Announcing the launch of ‘DeFi Database’

DeFiDatabaseBanner.png

DeFi (Decentralised Finance) is growing fast. So fast that it’s difficult to keep on top of all the new projects and DApps that are being announced. Nevertheless, it’s something I’ve been trying to do since the summer of 2020, and over the months I’ve accumulated a decent list through my own research. It occurred to me that this research might be useful to others in the community, and so to celebrate the milestone of 500 projects added, I’m today publishing my research as a public resource. 

I call it the DeFi Database, and it’s live today at https://defidatabase.info .

How to use DeFi Database

The DeFi Database is hosted at this link, where you can see the data as a read-only embedded table. 

A screenshot of the DeFi Database site. Sorting, Grouping, and Filtering is supported.

A screenshot of the DeFi Database site. Sorting, Grouping, and Filtering is supported.

By default, the projects are sorted by Name A-Z. You can however sort by whatever you wish. Single or multi-level sort supported.

Columns currently included are Name, Category (multiple supported), Short text description, Ecosystem (i.e. blockchain network), Link (URL) and ‘Primitive/Token’ (‘True’ if there is a token associated with the project, otherwise ‘False’). Additional columns may be added in future (see FAQ below).

The ‘category’ is probably the most useful for discovery of new projects. For example, you could Filter on category to see a list of projects with the tag ‘Stablecoins’:

Applying a filter on category contains ‘stablecoins’.

Applying a filter on category contains ‘stablecoins’.

At time of writing, the following category taxonomy was in use:

28 DeFi categories (so far).

28 DeFi categories (so far).

You can also Group data. For instance you may wish to Group on the ‘Ecosystem’ column to differentiate ‘Bitcoin-only’ DeFi projects with those that are multi-chain.

Grouping data on ‘Ecosystem’.

Grouping data on ‘Ecosystem’.

Finally, find what you are looking for quickly by using the search tool (top right) or simply pressing Ctrl / Command + F.

The database has been built using https://airtable.com/. If there are any other questions on functionality it is suggested to read the air table documentation. 

That’s about it! Thanks for your support, and if you want to be informed about new developments with this database or other stuff I’m working on, please feel free to subscribe using the form here.

Frequently Asked Questions (FAQ)

Is this a commercial project?

No. This is a hobby project that has been opened up for the benefit of the wider community. No money has changed hands in the creation and distribution of this database. All data is publicly available, and there are no sponsored record insertions or promotions.  

Who maintains DFDB?

At time of writing, the DeFi Database is maintained by me, Andy Bryant, a professional in the crypto space and DeFi enthusiast. I intend to keep DeFi Database updated myself in the near term, at least until this task becomes too heavy on my time. If you’d like to volunteer to help out, please do get in touch!

Why is X project not in the database?

If there is a DeFi project that you cannot find in this database, then it’s usually because (a) I’m not aware of the project yet, or (b) it’s not eligible for inclusion in the database. To find out more about what makes a project eligible for inclusion, see below.

What sort of projects are eligible to be featured on DeFi Database?

Any serious project that can reasonably considered as related to ‘DeFi’ (i.e. financial applications that do not rely on central financial intermediaries) is eligible for inclusion. 

The following will not be added:

  • Copycat or ‘me-too’ forks of projects that doesn’t bring any meaningful new innovation (e.g. ‘food-coin’ yield farms, meme-based projects, etc.)*

  • Tokens or blockchains that are just new assets, without a meaningful connection to DeFi (i.e. this is not a list of tokens like CoinGecko / Coin Market Cap).

  • Test net projects that aren’t interacting with main net contracts or processing ‘real’ crypto assets.

  • Projects that aren’t directly or indirectly linked to financial applications or primitives (e.g. logistics, gaming).

* There may be exceptions made in particular situations (e.g. Sushiswap was added as a clone of Uniswap because of its innovations around governance).

If you would like to submit a new project for inclusion in the database, please be my guest; you can use this form here. They will be added after review.

Is this just for Ethereum DeFi projects?

No. Although Ethereum is where most of DeFi is currently transacting, DeFi projects on any blockchain network can be eligible. At time of writing, featured blockchain networks include ETH, BTC, SOL, XTZ, BNB, DOT, EOS, ADA, and TRX although the vast majority of projects are on ETH. I can’t guarantee great coverage for less active networks.

I’ve spotted a mistake, how do I let you know?

For errata, please get in touch using this form or the ‘Errata’ link on the site. Thanks for your support in keeping this a useful resource.

Why is there missing information on some records?

I don’t always have the time to complete all records in full, usually because I was just making a brief note after seeing the project name featured somewhere else. I do intend to go back and fill in the gaps, but it might not happen straight away. 

What’s coming up for DFDB?

I will endeavour to stay on top of latest developments in the DeFi space, and in future expect to be making more additions for non-Ethereum blockchain projects as these other DeFi ecosystems begin to emerge. I may also add new columns (e.g. Twitter handles) but since that will take a lot of back filling it could take some time.

If you’d like to know anything else, please get in touch! And thanks for your support.

@AndyJBryant
@DefiDatabase



A 101 on Bitcoin Halving

 
Image credit: Andrey-Burmakin

Image credit: Andrey-Burmakin

This is my second Bitcoin halving event, but for many people following the crypto / bitcoin space this will be their first. I thought it might be useful to write a few words on the most common questions that I get asked about this significant event in Bitcoin.

The next halving takes place on May 12. What is the halving? Why does it happen every 4 years?

Bitcoin, by its design, is deterministically bound to follow a predefined supply curve. What this means is, the creation of new bitcoins (which is baked into the system and can’t be changed) is mathematically enforced to follow a known schedule.

It started off 11 years ago that every 10 minutes 50 bitcoins were emitted by the Bitcoin protocol (by the mining process). Roughly 4 years later, this dropped in half, so from the year 2012, only 25 bitcoins were created every 10 minutes. Then, 4 years later, in 2016, this halved again, so only 12.5 bitcoins were created every 10 minutes.

This event where the rate of emission of new supply cuts in half is a very important event in bitcoin known as the “Halving”. Nobody decides to do it. Nobody controls this. It is baked into the very DNA of bitcoin. Everyone who wants to participate in bitcoin has to agree that this is the way it is and it can’t be changed.

You can think about it like every 4 years half of the world’s gold mines suddenly vanished. This doesn’t change the existing supply, it just affects the rate at which new supply is created.

Why was Bitcoin designed this way and what does the bitcoin halving mean for demand?

The whole point of all this is for bitcoin to become harder and harder money over time. It is mathematically-enforced digital scarcity. That’s why people get so excited about it; it’s the opposite of what governments are doing with all this ‘quantitative easing’ / money printing — some are calling it ‘quantitative hardening’.

The bitcoin supply curve started steep (50 btc / 10 minutes) and gets flatter at every halving event. That’s how 87% of all bitcoin that will ever exist was created already in the first few years, while the last bitcoin that will ever exist won’t be created until after the year 2100 (if bitcoin still exists). It’s asymptotic. This doesn’t take into account all the bitcoins that are lost forever due to private keys being thrown away or forgotten; some estimates put this figure at 4 million btc (~20% of circulating supply).

image modified from https://www.bitcoinblockhalf.com/

image modified from https://www.bitcoinblockhalf.com/

So, the halving is directly linked to supply of bitcoin, and indirectly affects demand as people increasingly compete to acquire an asset that they know will become more scarce after the event.

Bitcoin is the first financial asset in history for which we have 100% predictable and deterministic supply many decades into the future.

Why and how does the halving affect the price of Bitcoin?

So, while halving doesn’t directly change demand for bitcoin, it does slash the new supply in half. Rudimentary economics theory would suggest that if you slash supply, with demand unchanged, then the price must rise. In reality there are many other things at work, with psychology, hype, and expectation playing a key role in price. Believers in efficient markets would suggest that since the supply change is known well in advance, then this should already be ‘priced in’ to the bitcoin price before the halving, and so price shouldn’t change. Others point out that when new supply drops, the bitcoin miners must keep more of the new coins to pay their operational expenses and so fewer coins make it to market, pushing the price up. Others still may be waiting to sell large positions on the back of all the hype, which could push the price down. So there are many factors at play here, and nobody knows for sure. It could just be a big non-event.

Joker about Bitcoin.jpg

Past performance is not a guarantee of future returns. That said, the halving has previously happened two times in bitcoin’s history (this next one will be the third time). So of course there is much speculation about what is going to happen. The last two times it happened, this preceded a bull run over the following months where price rose many thousands of %. But that doesn’t guarantee this will happen again. Especially since 4 years ago there are now more sophisticated ways of betting against the price (like futures or other derivative instruments) whereas last time there was only buy or not buy, so downward price pressure was suppressed.

Is it time to invest? Is it better to invest before or after the halving ?

We should expect some volatility. The bitcoin investor community is much larger than it was 4 years ago and many are encountering the halving for the first time. Google trends confirms that searches for ‘bitcoin halving’ has broken out to an all time high in recent weeks. 

Many people will get swept up in the narrative of the halving and invest lump sums over the coming days expecting a quick return. Cautious investors will likely not try to trade this event given the uncertainty. Long-term investors may choose to reduce the effect of volatility by ‘dollar cost averaging’, i.e. buying smaller amounts regularly over a longer time period, in order to smooth out the price fluctuations and reach an average price. Time-preference and risk appetite should also play a role.

The Bottom Line is that it’s impossible to give advice that is guaranteed to be good advice. I would just advise people to manage their risks accordingly.

Andy
May 2020

Andy’s 2019 Crypto Predictions Retrospective

A self-assessment of my blockchain bets in 2019 — did I hit or miss?

Time to score my predictions.. (Photo by Jorge Franganillo on Unsplash)

Time to score my predictions.. (Photo by Jorge Franganillo on Unsplash)

Everyone in the crypto space seems busy right now publishing their predictions for 2020. Yet while Twitter abounds with a variety of divination, some interesting and thoughtful, but also some delusional and naive (Sorry #XRPArmy, but $1,000 XRP would value the asset at more than half of global GDP — not gonna happen), I notice that few people actually review their predictions from last year. Self-assessment and public disclosure is low, kinda like how your friend who plays poker online loves talking about their winnings but keeps silent about the losses.

So, in the decentralised spirit of transparency I’m going to take a minute to look back to my predictions for 2019 and critically appraise how I did. Any comments or disagreements more than welcome!

Brief Recap of 2019 Predictions

In December 2018 I summarised my predictions for 2019 as the themes hereunder:

  1. Securitizing tokens and tokenizing securities

  2. Institutional involvement in the cryptocurrency market

  3. The halo effect of industries being built around blockchain

  4. The future of stablecoins

  5. The rise of Proof of Stake

I’ll need to revisit some written excerpts in order to appraise these since they aren’t so specific (note to self: clearer statements next time). Quoted in line below.

Theme 1 : Securitizing tokens and tokenizing securities

(Prediction Result: Partial Hit)

I was right about the regulatory clarity and new ground-up security token exchanges, but not so right on the other points.

(Full text here.)

A key part of this trend will be the increasing prevalence of security tokens.

Based on all the activity in the security token industry this year, I think I can stand behind this claim, however if I’m critical of myself this statement is too generic to be worth much. In general the year definitely didn’t live up to the STO hype for some, although there still some notable developments and announcements. 

In the first half on 2019, the number of STOs grew 16% to 57 vs. 49 during the same period in 2018, while the number of ICOs fell 74% to 403 from 1570 (Source: inwara) 

we would expect to see an increasing willingness of institutions and issuers to take existing securities and ‘wrap them’ in a blockchain-based token.

Facing the limitations of the crowdfunding model, companies have begun pivoting from helping companies issue security tokens to helping them tokenize existing securities (Harbor being a notable example).

Elsewhere, some traction here but less than I expected. One highlight was China’s 20 billion yuan ($2.8bn) issuance of blockchain-based bonds in December. Several other startups have had their equity tokenized. But success has been muted in the real-estate sector. A number of publicized deals failed to come to fruition (like this one) as institutional interest failed to materialise on the demand side.

for the newer and more cutting-edge blockchain projects, we will see increasing clarity from regulators as to what constitutes a so-called ‘security token’ and under which rules they should/will be regulated.

Although many regulators are still adopting a wait-and-see approach, we did see plenty of good progress as security tokens continued to gain credibility from regulators and other entities in this space. For example, the UK’s Financial Conduct Authority (FCA) published guidance clarifying that security tokens do indeed fall under it’s regulatory scope, Germany’s BaFin approving a number of STOs (including those by Bitbond and Fundament), and the U.S. Securities and Exchange Commission (SEC) approving two Reg A+ token offerings (Blockstack and the Props Project).

I predict more exchanges will appear that are built from the ground up as explicit security-token exchanges, with all the regulatory measures and controls that will entail.

These ground-up security token exchanges are appearing (e.g. Templum, OpenFinanceNetwork, 1exchange), but are facing increased competition from incumbents (Coinbase, Binance) or traditional stock exchanges (SIX in Switzerland, or LSE in UK). Many start-ups are still quite some way from launching an actual secondary-market ‘exchange’ (probably because this is hard!) and either pivoting / narrowing their scope to just primary-market issuance. 

The legal ‘grey area’ in which many unlicensed exchanges are still happily (and profitably!) operating will continue to shrink.

The grey area shrunk less than I expected actually. There are still hundreds of exchanges out there that enjoy operating with lack of definitive regulatory clarity. Watch out for AMLD5 / FATF developments unfurling in 2020 though, as well as more statements coming from regional banks and regulators…

Theme 2: Institutional involvement in the cryptocurrency market

(Prediction Result: Miss)

I expected more crypto investments coming from traditional players, which didn’t materialise.

(Full text here.)

Now that it’s clear that crypto is here to stay, we will increasingly see larger pools of money beginning to get involved.

I’m surprised there wasn’t more public announcements of institutional bitcoin investments this year. It seems that the euphoric frothy ICO boom and bust caused some lasting damage to the industries reputation in the eyes of traditional institutions. Big banks and funds are staying away from the investment side, and most private bankers and family office investment chiefs that I speak to say they aren’t quite ready to dip their toes in yet, as if they are all waiting to follow someone else’s lead. There’s for sure plenty of institutional money that was accumulating bitcoin in 2019, but it was largely taking place independently or via special purpose funds or vehicles with a looser investment mandate.

The arrival of ever-more instruments such as futures, ETFs, Security Tokens, and even fixed-income crypto-securities will accelerate this trend.

Bitcoin futures were here already, with the notable new launch of Bakkt by the Intercontinental Exchange (ICE), joining existing futures products from the CME and other crypto-exchanges, even while CBOE abandoned bitcoin futures this year. ETFs are still stubbornly absent after the SEC’s repeated denial of ETF proposals including most lately one from Bitwise. 

Theme 3: The halo effect of industries being built around blockchain

(Prediction Result: Partial Hit)

There are many examples to back up this claim, but I’m docking myself the generic statement.

(Full text here.) 

In the short term, we can expect to see emerging industries directly sprouting from existing ones

I’m going to partially disqualify myself here because it’s too easy to confirm something so general. However, it’s certainly true that the crypto / blockchain ecosystem is quickly becoming a sprawling landscape. The excellent diagram below shows some scale of this, and while many of these companies and projects are still somehow related to the underlying industry infrastructure buildout, there are still some good examples of completely new business models emerging from that infrastructure. To pick some of examples:

  • Smart Contracts Infrastructure → Professional Contract Security Tools (e.g MythX)

  • Crypto Custody Infrastructure → Compounding Crypto Interest Accounts and lending (e.g. BlockFi)

  • Staking-As-A-Service Infrastructure → Independent Payout Auditors (e.g. BakingBad)

  • Decentralised Finance Infrastructure → Asset management tools (e.g. Zerion)

These completely new blockchain-native applications come in addition to continuing development in many core areas such as custody, insurance, lending, and exchange. 

Credit : Kyle Ellicott (Full Res Download here)

Credit : Kyle Ellicott (Full Res Download here)

Theme 4: The future of stablecoins

(Prediction Result: Hit) 

This year saw a big increase in stablecoin growth and innovation.

(Full text here.)

Whilst Stablecoins aren’t a brand-new addition to the Crypto ecosystem, I do predict they’ll solidify their place in the market in 2019.

Stablecoins have continued to pour onto the markets, confirming real demand. A Binance report from November 2019 indicated that 96% of institutions surveyed were using stablecoins, predominantly fiat-backed. Although many stablecoins are straightforward fiat-collaterized variants of the original stablecoin, Tether, there has also begun a number of new projects that innovate on different types of stablecoin, including crypto-backed, asset-backed, non-collateralized (aka algorithmic) stablecoins, and all sorts of hybrids. Notable launches include Saga (December) and Multi-Collateral Dai (November).These categories all come with different pros and cons around stability [sic], reserves risk, liquidity, trust, and so forth. We’ve even started seeing ‘stablecoins-of-stablecoins’ with projects such as USDx using a basket of other stable coins including USDC, TUSD, PAX and DAI.

Binance Research — Institutional Market Insights — 2nd edition

Binance Research — Institutional Market Insights — 2nd edition

Of course the big story of the year was Facebook’s Libra stablecoin (announced June), which raced digital currencies to the top of the agenda for many governments, given Facebook’s international reach. Furthermore, Central Banks all around the world seem to be discussing, announcing and working on stablecoins of their own, so-called CBDCs (Central Bank Digital Currencies). 

See my 2020 predictions for more on Libra and CBDCs.

Theme 5: The rise of Proof-of-Stake

(Prediction Result: Hit) 

PoS has caught on fire in 2019, with staking rewards being all the rage

(Full text here.)

My expectation is that as people begin to understand and experience investment yield in crypto, this will spark a new wave of interest in Proof of Stake blockchains, with main beneficiaries being the newer generation PoS projects […]

I wrote about this in more detail earlier this year, after predicting that staking rewards would start garnering more popularity for Proof-of-Stake (PoS) blockchains in 2019.

Plenty of evidence shows this to be the case. This year we have seen the launch of dedicated staking support by major exchanges like Coinbase Custody (March), Coinbase retail (November), Binance (September), and Kraken (December); the launch of Cardano’s Incentivised Testnet ‘Shelley’ (December), the seed-funding and rapid growth of institutional PoS services platforms like Staked (January), and many other Staking-As-A-Service companies popping up. 

Meanwhile, popular PoS cryptocurrencies like Tezos, Cosmos, Decred, and Cardano were busy being listed on an ever-greater number of large exchanges, large numbers of staking / delegate pools and associated tools sprung up, and a huge wave of articles and explainers appeared online as people started waking up to the appeal of earning compounding, non-custodial, realtime, fiat-busting yields denominated in crypto.

According to Staked, ~25% of the total cryptocurrency market uses PoS as a security model at the end of 2019 (up from ~10% at the beginning of the year according to my estimates). When (if?) Ethereum eventually switches to PoS that number will be greater still. However, while it’s clear that PoS is on the rise, I also think that the drawbacks of this security model are not being discussed enough and, I actually also believe we will see a sort of renaissance for Proof-of-Work blockchains in the future. 

So that’s it for 2019. Two hits, two partial hits, and a miss. I hope the above also served as a useful recap / cross-section of what happened in crypto in 2019. It’s hard to believe that I only wrote these a year ago! This space moves so fast, and I don’t expect that to slow down any time soon.

Roll on 2020! 

Andy
January 2020



The 'Economic Tech Stack'

And how Blockchain will trigger a Machine-Economy Explosion..

(NB this is part 2 of my Machine Economics series. Feel free to read Part 1, although this piece can also stand alone)

(Chicago Board of Trade, 1999 - Andreas Gursky)

(Chicago Board of Trade, 1999 - Andreas Gursky)

As internet technology continues it’s unstoppable march from the relatively benign world of information sharing and socialising, and into our more sacred and serious financial matters, the blurring lines between traditional finance and newer financial technology force us to reimagine centuries-old economic concepts in new ways. 

One of these unchallenged concepts goes something like this: We humans, as rational investors and economic decision-makers, will remain in the driving seat as shapers of the global economy. Even if the tools we use continue to get more sophisticated, ultimately they are only tools, and machine automation will stay confined to small pockets of economic activity in the same way that industrial robots are confined to very specific and controlled areas of manufacturing. In the economy, as in manufacturing, bots will be our slaves, but not our masters. 

But I don’t think this is the case. Time and time again we have shown that we are perfectly happy to cede some control and decision making to technology, in the name of convenience. Weighing up and making decisions is hard work, and as long as we are happy with the outcome, who cares if the decision is optimal or not? That’s why we let algorithms recommend our restaurants, our reading, even our relationships. Many people don’t want to be in the driving seat, both figuratively and now even literally, with self-driving cars on our streets only a few years away. 

Widespread automation of our economy is coming. And I’m not talking about job automation here, I’m talking about the whole global economic and financial system, and how it works. It may seem hard to believe because economics has changed so little in the last century, but we are poised for rapid and profound change similar to what the internet or smartphone did for commerce, triggered by the watershed innovation of Blockchain and Decentralised Ledger Technology. Thanks to Blockchain’s compatibility with machine automation, tomorrow’s financial decisions will increasingly be performed by algorithms, and as a result, the future economy will be unrecognisable to humans. 

In other words, Blockchain is the trigger for a Machine Economy explosion.

To try and unpack this, I have devised a new representation of the current economic system. I call it the ‘Economic Tech Stack’ and I will use it to help explain this vision of the future.

The Economic Tech Stack

Economies are large, complicated things. Fundamentally though, if your goal is to accumulate capital (as is the case in capitalist systems) then economies centre around resource allocation. If you really boil things down to first principles, then substantially all economic decision making comes down to three things: What am I buying? Who am I buying from? and When/Why/How do I buy it? That’s it. These are the first principles of economic activity.

Fundamentally, Economies = Resource Allocation

Fundamentally, Economies = Resource Allocation

We can take these first principles, written in human form, and restate them as principle layers on a stack. At the bottom, the Production Layer (i.e. the ‘What am I buying?’). On top of this, the Ownership Layer (i.e. the ‘Who am I buying from?’), and then finally the Investment Layer (i.e. the ‘When/Why/How do I buy it?’). We will break these down further, but in principle, these 3 layers or combinations therein can represent any economic activity. We know that Investment activities often don’t interface directly with the means of Production, but instead with some intermediate or indirect claim on this production via an Ownership structure (stock markets being a good example).

Human concepts of resource allocation can be considered as our ‘Economic Stack’

Human concepts of resource allocation can be considered as our ‘Economic Stack’

The Production Layer consists of two sub-layers; the economic agent layer and the governance layer. The economic agent is the part that actually creates value; be it a company, a contractor, a building, a government project, and so on. Something you might consider investing in. The governance layer ensures that this economic agent has effective controls and proper oversight, and is not taking on too much risk or breaking the law in its own interests.

The Production Layer consists of the actual value creation, and a governance component.

The Production Layer consists of the actual value creation, and a governance component.

Once you have Production, now you need to have a notion of Ownership. In other words who benefits from the value that is created in the Production layer? That’s why the Ownership Layer sits on top of the Production Layer. 

The Ownership Layer consists of two sub-layers; the contracts layer and the ledger layer. It is of course a problem if there are ambiguities who should benefit from the value created in the Production Layer, and so that’s where contract law comes in. Contracts are drawn up to make sure that owners clearly have a paper claim to the means of production, and contracts are also used to transfer ownership from one entity to another. Then you also must have a means of actually knowing who owns what, so we have ledgers to keep track of this; shareholder registers to track company ownership, or land registries to track real-estate ownership, for example. 

The Ownership Layer facilitates the distribution of value to certain entities, enforced by contracts and tracked by ledgers.

The Ownership Layer facilitates the distribution of value to certain entities, enforced by contracts and tracked by ledgers.

Now things start to get even more interesting as we move up to the Investment layer. This is where a vast amount of economic activity happens. Quite often, the investment layer doesn’t consider the fundamentals or specifics of the Production layer at all, even though this is where the original value creation happens. Instead, complex financial machinations thrive, poring over prices and other signals in the aggressive pursuit of profit. Modest real-world economic activities are magnified into layer upon layer of synthetic speculation. This is where proprietary mechanisms, macro-economic forces, and behavioural aspects dominate. 

The Investment Layer is where the vast amount of economic activity happens

The Investment Layer is where the vast amount of economic activity happens

The Investment Layer consists of several sub-layers; The securitisation layer, the exchange layer, the orders layer, the strategy layer, and the data layer. 

The securitisation layer, a huge space and hard to summarise in one sentence, effectively engages in activities that take an existing thing that you can own, and repackages it in a way that’s compatible and useful to trade and interface with open markets. Once you have these packaged securities you need somewhere to trade and exchange it with other economic actors, and so exchange infrastructure is the next layer, for example stock exchanges, estate agents, capital markets and so forth. And once you have the infrastructure in place to exchange securities, now you need to be able to place the orders to do so (“I want to buy X” or “I want to sell Y”), so the orders layer comes next and represents the layer through which instructions are sent to the exchanges. These instructions are devised as part of an overall strategy, here shown as the next strategy layer, where decisions like “when do I buy?”, “how much do I want to buy?”, or “do I buy or do I sell?”. And finally, these strategies are usually built on some form of implicit or real-word data, data being the ultimate external input, making the data layer the most extraneous part of this model and the top of the Investment Layer.

So that’s the full ‘Economic Tech Stack’ model; three principle layers (Production, Ownership, Investment) with nine sub-layers in total (economic agent, governance, contracts, ledger, securitisation, exchange, orders, strategy, and data). I will use this framework as a scaffold to hang my remaining claims on to, as I return to the point of how Blockchain technology will be the trigger for a Machine Economy explosion. 

My complete “Economic Tech Stack” model

My complete “Economic Tech Stack” model

Towards a Machine-dominated Economy

To imagine what the transition to an economy with widespread machine automation looks like, it helps to first consider where we are starting from. Using the Economic Tech Stack to define what type of agents occupy each layer of the stack, it’s clear that the traditional economy is a very human affair:

The Traditional Economy sees humans occupy all layers of the Economic Tech Stack

The Traditional Economy sees humans occupy all layers of the Economic Tech Stack

You have human workers actually doing the work and creating value (the economic agent), directors who are governing and making sure things run properly, lawyers drawing up contracts to facilitate ownership and transfers, registrars maintaining the ledgers and public records, bankers who securitise these interests to be market-compatible, brokers that facilitate exchange of securities, traders that give order instructions to the brokers, investment advisors (or fund managers) who’s strategies inform the traders, and finally analysts who provide data and research to the investment advisors. At every layer a human actor.

So, while the traditional “human” economy seems pretty recognisable, we can sense that in recent years the above no longer fully represents today’s reality. The incursion of machine-automated systems into our economic fabric has already begun, and today our global economy lives in a hybrid state. While it is true that in many layers of the stack, not much has changed in the last century and humans still dominate, in some layers we increasingly see a move towards sophisticated, man-machine processes and technologies, particularly towards the upper parts of the Economic Tech Stack:

Today’s Hybrid Economy sees the incursion of man-machine processes into the otherwise traditional stack

Today’s Hybrid Economy sees the incursion of man-machine processes into the otherwise traditional stack

In the Investment Layer of this hybrid economy, the white-collar shirt is fast being replaced by lines of code. Who still picks up the phone to ‘call their broker’? Instead, as we see above, exchange orders are routed through APIs, as instructed by sophisticated technical algorithms, which are partly self-taught (aka machine learning) and partly designed by software engineers, in collaboration by numerical geniuses commonly known as ‘quants’.

This human-machine paradigm underpins the growth of today’s hybrid economy, and when we arrange these on the Economic Tech Stack it seems that the transition towards a machine-dominated economy is clearly underway, with the Investment Layer as the foothold. 

Resistance to progress

And yet, while some progress can be observed in this hybrid economy, the speed of this progress thus far hasn’t exactly been sensational. If a banker living 100 years ago travelled in time to today, they would still be familiar with this economic system in general, except to find that trading floors had been replaced largely by machines which traded at higher volumes and speeds. Things have changed, but progress of automation in the last century, especially compared to other industries like manufacturing, has been slow.

The reason for this slow progress comes down to the inherent compartmentalisation of the Economic Tech Stack in today’s economy. There is simply too much friction and fragmentation to allow efficient innovation and development. Anybody who has worked in a dysfunctional company where departments or teams don’t communicate well will understand this; the interfaces are important. The barriers or silos that exist within an organisation are always counterproductive, and likewise, the barriers that exist within or in-between the layers of the Economic Tech Stack impede development and confine automation to small pockets. Unfortunately, whenever humans are involved, these barriers to progress tend to be self-perpetuated through a mechanism resembling the below:

Human involvement inherently tends to impede machine automation across industries

Human involvement inherently tends to impede machine automation across industries

As a result, the current hybrid economy is riddled with systemic barriers throughout the stack. Things like national borders, financial intermediation, creaking legacy infrastructure, protectionist technology mindsets, lack of standardisation, back office costs, company silos etc. all act to inhibit system automation and productivity gains. Whether through deliberate rent-seeking, organisational inertia, or simple incompetence to change, innovation is held back by the incumbents of the system causing these systemic barriers to exist. 

Given this situation then, and the slow progress to date, how can I support my claim that “widespread automation of our economy is coming” any time soon?

Blockchain is merging the Economic Tech Stack

Blockchain is a barrier-removing technology. It removes barriers by virtue of its fantastic properties, namely for being distributed, open, and secure. It’s Distributed property overcomes barriers of reach, allowing it to cross national borders and disintermediate centralised gatekeepers. It’s Open property overcomes barriers of innovation; the open source nature allowing anyone to experiment at the fringes while still forcing standardisation through shared protocols. It’s Secure property overcomes barriers of cost, because as a public good it doesn’t need to make profit, or have a substantial back-office to be secure, or rest on creaky ageing infrastructure that’s difficult to maintain.

Thanks to these properties, the use of Blockchain has huge implications for the Economic Tech Stack, because by overcoming these various barriers we can escape the forces that are preventing the automation of today’s economic machinery. The negative feedback loop that removes incentives for industries to integrate, collaborate and standardise will be replaced by the positive feedback loop of efficiency gains, aligned incentives, and rapid global diffusion. Furthermore, by opening up and improving the interface between the various layers of the Economic Tech Stack, we can finally provide mobility between layers and vertical integration opportunities which until now have been severely limited. As these interfaces and connections develop and digitise, removal of human-induced barriers will cause an ever-greater share of the stack to be traversable by software, dramatically increasing the capabilities of algorithms to automate the economic machine.

In other words, Blockchain will merge the Economic Tech Stack, shifting it from a world of human barriers, walled gardens, and protected business models to an open economic space that is fully compatible with machine automation.

Blockchain facilitates vertical integration capabilities to autonomous agents, by merging the layers of the stack

Blockchain facilitates vertical integration capabilities to autonomous agents, by merging the layers of the stack

As the layers increasingly merge into an open economic space, the machine agents, endowed with ever-greater cyber-mobility, will see little advantage in specialising or restricting their activities. Instead they will become increasingly general; why would a software algorithm only function as a broker when it could also be the analyst, the investor, the trader, the banker, the registrar, and more? With such vast economic cyber-territory up for grabs, the benefits of vertical and horizontal integration will be irresistible. 

Any economic structures from the old paradigm, which still have some arbitrary human involvement in some layers of the Economic Tech Stack, will increasingly and rapidly face a decisive disadvantage. This will force the Traditional (human) economic entities to pivot to the decentralised (machine) economy, in the same way that internet forced traditional high street retailers to pivot to e-commerce, just to survive. 

Already, the decentralised equivalents of every layer of the Economic Tech Stack are in various stages of development:

The future economy will be a fully decentralised stack, powered by blockchains and native to programmable machine agents

The future economy will be a fully decentralised stack, powered by blockchains and native to programmable machine agents

In a later blog post I will dive deeper into these concepts, explaining further the function of such decentralised blockchain crypto-networks and giving examples of how I see machine agents operating across them. Important to note here is how I’ve populated every single layer of the Economic Tech Stack without involving any intermediaries whatsoever, using decentralised blockchain concepts which aren’t theoretical, but are right now under development. 

Once in a while, an invention comes along that does not just incrementally improve the status quo but completely shifts gear and ignites a whole new phase where the speed of improvements ramps up and sets us on a whole new trajectory. Since the new trajectory of development is often orders of magnitude faster than to the previous status quo, these innovations are often coined as ‘revolutions’. Replacing bronze with iron is one example. Replacing muscle power with steam power is another. Manuscripts vs. the printing press, analogue vs. digital electronics, closed communication networks vs. the Internet: all very different inventions but all with strikingly similar characteristics: These revolutions all solved some decisive limitation of the status quo, and by doing so unleashed unimaginable, exponential technological change.

I’m convinced that today we face a similar shift. The invention of Blockchain solves a decisive limitation of the economic infrastructure as we know it, and the potential it offers for rapid automation of the Economic Tech Stack is hard to fully grasp. By facilitating an open economic space that’s fully digital and conducive to software automation, the rise of blockchain crypto-networks will mean machine agents will be free to roam the entire digital economy, and this freedom will bring unbounded and accelerating development of future economic infrastructure. 

It’s a machine economy explosion, and it’s already underway.


Andy
November 2019

Thanks to Akram Hussein and Richard Craib for comments on the draft.

InHuman Economics Part 1: Finance's Inflection Point

Andy Bryant, March 2019

ai-n-blockchain.png

The future economy will be barely recognisable to humans. Investment and economic decision-making, far from being under our control, will be so advanced in sophistication that human minds will be relegated to mere passengers in a cambrian explosion of novel, automated methods and financial forces. It will be difficult to even grasp the rules of the game. And behind everything, driving a paradigm shift unmatched in its breathtaking speed, will be legions of autonomous programs; evolving, transacting and traversing across a universe of Blockchains.

Reality Check…

Ok, so back down to earth for a second. That’s very different to what the economy looks like now. While today’s user interfaces are certainly improving, investing and transacting is still a very human and manual system. It still takes the same length of time to open a bank account as it did a century ago, and I still make some payments today that would arrive faster if I delivered a bag of cash by horseback. Nothing really happens without real people making instructions, checking instructions, approving and processing instructions, and then waiting...

In this context, my above vision of an unrecognisable automated economy seems a long way off, but I think it’s closer than most believe. Exponential take-off is often hard to spot in the moment, even if we’ve seen it happen before..

Information Explosion

According to a Cisco study, the collective sum of the world’s data will grow from 33 zettabytes in 2018 to 175 ZB by 2025. If a full, 4-drawer filing cabinet contains about 1 gigabyte of text data, that’s the equivalent today of these filing cabinets springing into existence at the same rate that espresso cups of water go over the Niagra falls. At this rate, it would take just under 2 minutes for fresh data to exceed ALL of the data that existed in the world of 1986.

One filing cabinet filled as each espresso cup of water falls

One filing cabinet filled as each espresso cup of water falls

We all know what’s changed between 1986 and today to cause the explosion of this information economy. The decentralised Internet has allowed the creation, sharing, and publishing of data and content to proliferate exponentially, without the need for centralised publisher’s approval or printing equipment. Further, beyond blogs and cat videos, an ever-increasing amount of this information is now procedurally-generated, never to be seen by human eyes but instead the prized resource for an impalpable network of algorithms and APIs emerging from the hyper-connected fabric of cyberspace. IT innovation races on, constrained only by the imagination of the architect, be it man or machine.

Back To Bankers

So if the internet is a compelling example of how decentralisation liberated and supercharged the information economy, the financial economy, by contrast, looks positively primordial.

So why haven’t we seen the same with finance?

The traditional financial system is still just like the state of information before the internet. It is centralised, and a top-down system. In top-down systems, objectives start at a  high level, and increase in complexity as that objective is broken down into smaller more manageable units. Most states, corporations, and other man-made systems are organised in this way. They’re easier for us to manage, understand and regulate, but the problem is that the scope and potential of such systems are constrained by early decisions made with limited information. Chance innovation and serendipity are less likely to occur. Actual end user feedback takes time to travel back up to the decision makers. Goals are inflexible and unresponsive to changing conditions.

Most importantly though, top-down systems naturally create silo effects. Everything is partitioned and guarded. Bankers compete with their own colleagues for bigger bonuses. Managers zealously guard their resources and reach to hit their targets even if they no longer make sense. There is little incentive to collaborate, spend time on cultivating new ideas, or spend money on connecting or automating legacy infrastructure. Walls are everywhere in the financial system, between companies but also within them. Little wonder then that in today’s financial system most things work pretty much like they did a century ago. Humans still rule, and even early efforts in algorithmic automation (e.g. trading strategies) are confined to specific sectors and shrouded in secrecy. In finance, then, people generally have got used to meaningful global innovations like ATMs or credit cards taking decades to emerge, and as a result are completely unaware of the impending explosion of exponential change that’s about to occur.

Blockchain’s Dehumanising Detonation

Changes to the status quo that require some painful reversal before moving forward in a new direction don’t happen naturally, and rarely from the top down. It’s why societies undergo revolutions, incumbent companies undergo break-ups, and financial services are still bloated with rent-seeking humans extracting value and building walls. I don’t blame the bankers or rent-seekers; it’s perfectly rational human behaviour given this existing system. But those walls are about to come down.

Blockchain is not a top down system. It doesn’t care about profits. It doesn’t need walls to protect itself. It doesn’t even really need people to work. It is decentralised, open, and apolitical. Essentially, it’s that critical financial piece we were missing; achieving for digital scarcity what the Internet achieved for digital abundance, and allowing for the transfer of value across an untrusted medium without the need for humanised financial silos. Together, these will merge to form a substrate for the emergence of a whole new economy. It will be a fully programmatic economy, compatible with automation, an economy dehumanised by A.I. . Without walls, human gatekeepers will become unnecessary. Machines will transact directly with machines. Data and predictions will be tradable assets. Economic development will be uninhibited by boardrooms or biology. And without these limitations, progress towards dehumanisation of the economy will be a detonation comparable to the Information Explosion that started in the late 20th century. The game will change, InHuman Economics will emerge, and our human needs will increasingly be only a minor parameter in the unfathomable system that emerges. Best we stick up for ourselves...

Connectors and Compounders

In this series I will try to unpack how I see this transformation unfolding. While it’s impossible to predict the exact sequence of developments, I can generally see innovations falling into two categories or dimensions, which I shall call Connectors and Compounders. Connectors will refer to ‘horizontal’ developments that level the playing field; breaking down walls and silos, bridging gaps, increasing velocity and collaboration through connectivity and interoperability. Compounders will refer to ‘vertical’ developments or layers that leverage Connectors to make impossible things possible; brand new capabilities that emerge from this substrate, enabled by the decentralised and inhuman properties of the system.

Through these Connectors and Compounders effects, I expect the pace of change towards a dehumanised economy to be rapid and unexpected. Things are already happening, and while most people focus on crypto prices the foundations of the InHuman economy are being laid.


Andy
March 2019

Yield of dreams: Why proof-of-stake could drive the next big wave in crypto investing


Money-tree.png

Rollercoaster memes aside, lets face it; bitcoins value methodology is still a black box. I’m not saying that there’s a question that bitcoin has value - of this there is no doubt in my mind. The question of course is what is this value? What should it be now? Is it undervalued or overvalued?

Although it occasionally experiences what some might call ‘price stability’, it’s clear to any observer that the price of bitcoin and other cryptocurrencies fluctuate. A lot. Comparing against any other asset class against any reasonable time frame shows a price volatility that stands out.

 
volatility_btc1.png
 

Now, the pundits wax lyrical about what currently drives crypto prices. Examples abound of all sorts of chart wizardry and/or novel fundamentals analysis involving new-fangled metrics around network stats and mining economics. I’m sure to some (limited) extent, these methods to establish value can be useful. But remembering how even a broken clock is right twice a day, I’m still skeptical that any of these valuation methods have proven to be consistently correct, even if sometimes they appear to be. 

Let’s be honest with ourselves; any asset that is subject to multiple 100’s (or 1,000’s) of percentage points gains, followed by a 50-95% retracement in just the space of a few months, is clearly still undergoing price discovery. And i’m not just talking about the 2017-2018 bubble - this has happened several times now:

 
Cycle Start Base Peak Max. Gain Pull Back
Jun 2011 $0.95 $32 3,370% 94%
Jan 2012 $2 $7 250% 49%
Apr 2013 $13 $260 1,900% 83%
Nov 2013 $200 $1,242 521% 88%
Nov 2017 $750 $19,777 2,537% ???
 

It’s clear to me that these types of price movements are the fractal vacillations of a brand new asset class with the powder-keg combination of extremely high technological potential and little to no compatibility with existing mature valuation methodologies. As a result, as far as I have observed price action is dominated by the only applicable model: human fear and greed.

What else do we expect? There surely cannot be consensus on value when there isn’t even consensus yet on exactly what bitcoin (or other cryptocurrencies) actually is. Of course fear and greed becomes the default when nothing else we have fits this paradigm. Even the term ‘crypto-currency’ is a misnomer that 10 years after bitcoin’s launch still continues to constrain the mainstream financial press into assessing it as nothing more than an alternative / inferior currency. But who says bitcoin is competing with currencies? There are already several schools of thought on how to regard bitcoin as an asset class, with no consensus (ironically) as to which is most suitable. Consider these several common narratives :

  1. bitcoin is a currency. Its value arises from comparing its market cap against the M1 money supply of other fiat currencies / countries.

  2. bitcoin is a payment network.  Its value arises from comparing its transaction volume against other payment networks like Visa.  

  3. bitcoin is digital gold. It’s value arises from sharing the convenient monetary properties of gold (portability, divisibility, fungibility, store of value) without the inconvenient ones (storage, transportation).

  4. bitcoin is a capital-intensive utility. It’s value arises from the economic cost of securing the network through PoW mining.

  5. bitcoin is a protocol. It’s value arises from being the missing piece of the decentralised internet; introducing digital scarcity in a world of digital abundance.

So which is it? Some or all of the above? None of them? One of the underlying issues is that there doesn’t yet seem to exist a suitable model for most analysts or investors to benchmark bitcoin or other proof-of-work coins against existing asset classes. It’s just not compatible with their frameworks, and as a result I think we’ve seen hesitation for most big funds to allocate some of their portfolios to this (relatively) new asset class, as crypto largely remains excluded from modern portfolio theory.

But that could be about to change…

The importance of Yield

Yield in investing describes, in essence, the income that an asset produces. Yield is typically considered separately to the price increase (capital gain) which is another method of making a return. In stocks/equities, the yield comes in the form of a regular (we hope) dividend paid to shareholders. In real estate, the yield is the rent you can charge. The yield is the interest you can make on your cash deposits, or the coupon on your bonds.

The income you can receive on a financial asset is a very important part of establishing the its value. It is the assets income, as well as the the probability/risk of receiving this income, that underpins most investment decisions of today’s financial markets. Essentially it is the one common anchor that helps asset managers benchmark different assets against each other, and establish a preference for how much of each they want to own. Even cash fits into this framework, and investors who choose to ‘not-invest’ by preferring cash over other higher-yielding investments are making just as much of an active investment decision as the most ruthless Wall Street wolves.

Bankers and investors often use the income generated by an asset to establish it’s price:

Person A: “I’ve got a magic machine here that will print $10 per week, forever. Wanna buy it for $25k?”
Person B: “Sounds good! That same $25k in my 1.5% savings account only makes me a little over $7 per week”
Person A: “… Did I mention that the machine breaks down 30% of the time?”
Person B: “No Deal! Too risky…”
Person A: “Ok, ok. How about I give it to you for $20k”
Person B: “Deal.”

Ok so I glossed over some technicalities here like compound interest, but you get the idea. As you can see, yield allow investors to better understand how they will be compensated for taking on various levels of risk, and thereby benchmark different assets against each other. This is price discovery in action.

Mining rewards are not yield

Proof-of-Work (PoW) blockchains such as bitcoin are fascinating because they align self-serving interests with shared interests. The mining community, by participating in the race to to solve the block solutions and enrich themselves, also secure the network and provide consensus and authority over the “true” history of transactions. Miners also receive demand-side rewards in the form of discretionary transaction fees.

But even though this is a financial return / income for miners, this is not the same thing as yield. For in the case of yield, investment returns should flow to the holder of the asset whereas mining rewards are essentially a return on the capital equipment used to provide the mining work. As such mining rewards are ‘earned’ exclusively these days by the owners of specialised facilities with millions of dollars of equipment. Gold investors know the difference between buying bullion and buying shares in gold miners, and while those mining shares might pay a dividend yield, it is not a yield being earned on the gold itself.

Gold, like bitcoin, doesn't earn a yield either (a common criticism of gold as an investment asset). This is probably why gold is frequently lumped together with other industrial ‘commodities’, even though industrial commodities (like iron or grain) have completely different valuation proposition: generally as inputs to value-adding processes, while gold for 6,000 years has been very differently regarded as a safe-haven, or store of value, or hedge against inflation. Gold is (mostly) a financial asset and doesn’t have (real) intrinsic value like industrial commodities, and yet is categorised in the same way - Why? Because it can’t be easily benchmarked against typical, yield-producing, financial assets such as bonds or equities. This I believe is the same problem suffered by bitcoin and other proof-of-work cryptocurrencies, and, given they don’t enjoy the 6,000 year history of gold valuation, why price discovery in crypto is still fraught with volatility as bulls battle bears in a relentless, algo-pumped, social-media amped, primal Battle Royale between greed and fear.

Staking is yield for crypto

People of course still invest in bitcoin and all of the other Proof-of-Work coins because of their expectation of price increases and capital gains. Same goes for fine art, vintage cars, unoccupied properties and so forth. But the types of investors who look for yield have largely had no palatable investment options in the crypto sphere.

That is, until now.

While Nakamoto-consensus and the Proof-of-work paradigm is responsible for kicking off the crypto currency industry, there are other alternatives for securing and maintaining blockchain integrity. The most popular alternative mechanism you may have heard of is called Proof-of-Stake (PoS). As I mentioned in my earlier post 5 Blockchain Industry Predictions for 2019 :

Unlike PoW chains (such as bitcoin), where these days mining rewards are exclusively the purview of specialised facilities… with PoS chains rewards become obtainable to anyone and everyone who owns coins. In such a scheme, the average Joe need only offer up his coins as a sort of collateral, and they can participate in the verification process needed to add new blocks to the chain. In this way, they can receive fresh new tokens as a ‘reward for being honest’, and they can do this while remaining in full possession of their funds; they don’t need to lend them elsewhere. In turn they can earn compounding interest.

We have our yield!

In this model, income flows to the holder of the asset and not to the owner of expensive mining equipment. So we have a form of crypto asset investment that is compatible with the existing mindset and methods of typical investors in financial assets. One caveat is that the yield itself is denominated in crypto, not fiat. Depending on how you look at this, it could be either an unwanted source of volatility, or a huge plus if the yield you were earning was also subject to capital gains (as well as the principal) without prejudice. It would be similar to if owning Apple shares meant receiving a fixed dividend not in dollars but in more Apple shares, except that Apple was contractually obliged to pay the shares every time (i.e. not discretionary) and it paid the same number of shares each year regardless of their rising (of falling) share price.

While Proof of Stake is not a new concept, the first generation PoS blockchains encountered various flaws that were unexpected and difficult to remedy retroactively (inc. so-called ‘weak subjectivity’, ‘long range attacks’, or ‘zero opportunity cost’ problems). It is only recently that relatively large projects are emerging that are deploying it successfully. Projects such as Tezos (live since 2018 Q3), Cardano (coming 2019), and Decred are all examples of well-designed Proof of Stake systems. Even Ethereum, the second largest PoW blockchain (at time of writing) is soon planning to switch over to PoS when it launches the network upgrade known as Constantinople.

FEBRUARY 2017

Cryptocurrency Market Capitalisation by Consensus Type (Top 25 Coins)

FEBRUARY 2019

Cryptocurrency Market Capitalisation by Consensus Type (Top 25 Coins)

Conclusions

Staking rewards are a big deal. For most investors, whether retail or institutional, they will be the first taste of yield in the crypto domain. My expectation is that as people begin to understand and experience investment yield in crypto, this will spark a new wave of interest in Proof of Stake blockchains. The main beneficiaries will likely be the new generation of PoS projects that make it very easy for non-technical users to stake or delegate their funds. For many of these projects, the staking rewards are just a by-product of their consensus design, with the main mission being a whole new blockchain ecosystem enabling new types of smart contracts and capabilities. Nevertheless, with a design built around Proof of Stake, the holders of the token may be more likely to hold on to their coins (taming volatility), more incentivised to participate in consensus (boosting decentralisation) and reduce the need for PoW mining, which is more energy-intensive.

The big prize, however, will be to bring cryptocurrencies a step closer towards being accepted as a serious investment asset class. By going beyond capital speculation, bringing mathematically enforced, predictable yields with no counter party risk, investors and institutions will finally be able to start wrapping their heads around how to price crypto properly. That means more disciplined valuation, better risk models, disciplined investment, and a higher readiness by big funds to deploy capital into crypto as part of established diversification strategies. I would expect price discovery to strengthen and volatility to decrease, even though many investors will still expect capital gains in addition to yield (perhaps like in real estate). Crypto capital markets will start to take form.

In an era when most investors are starved of yield, I see no good argument for why crypto yield will be any less legitimate than income-investing in any traditional asset class. Indeed, some investors may even prefer to take the additional risk of price volatility in exchange for mathematically-guaranteed payouts. The notion of a 0% default rate could become a very interesting proposition indeed when the next cycle of government debt crises begin to emerge. In any case, crypto-yield is an important development and it seems clear to me that Proof-of-Stake blockchain assets will continue their march into the world of traditional financial investing.

Andy
February 2019

5 Blockchain Industry Predictions for 2019

Vertigo3d | Getty Images

Vertigo3d | Getty Images

I can highlight five main themes that I think will start to take hold this year.

  1. Securitizing tokens and tokenizing securities

  2. Institutional involvement in the cryptocurrency market

  3. The halo effect of industries being built around blockchain

  4. The future of stablecoins

  5. The rise of Proof of Stake

1. ‘Securitizing tokens and tokenizing securities’

While most people agree that the 2017 ICO boom was largely frothy exuberance and speculation (most ICO projects never delivered what they promised) one good result was that it catapulted blockchain-based tokens to the front of people’s minds and awareness. Fundamentally, the nature of token-based assets holds a lot of promise; with benefits including reduced complexity of transactions, improved settlement times, democratisation of venture-stage investing, and greater liquidity for early investors who aren’t locked into their decision for 5–10 years. But of course, regulators are never far behind and what we can expect now is a greater amount of scrutiny and regulation of this new fundraising mechanism, to help ensure that investors (particularly consumers) don’t get burnt.

A key part of this trend will be the increasing prevalence of security tokens. However, I believe there are two sides to this coin; the tokenisation of existing securities and the securitisation of tokens.

In the former (tokenising securities), we would expect to see an increasing willingness of institutions and issuers to take existing securities and ‘wrap them’ in a blockchain-based token. This allows them to access some of the benefits mentioned above, but also allows for new and interesting capabilities such as divisibility (fancy owning 1/1000th of a Picasso or Berkshire Hathaway Class A share?) or new access (e.g. private REITs which currently have multiple rules preventing most investors from being able to participate in them).

Meanwhile, for the newer and more cutting-edge blockchain projects, we will see increasing clarity from regulators as to what constitutes a so-called ‘security token’ and under which rules they should/will be regulated.

In general those that are speculative and purchased with the defined expectation of returns will be classified as security tokens, while those that simply allow access to a new network as a type of ‘fuel’ for that network will be classified as utility tokens (albeit probably still with speculative potential). I predict more exchanges will appear that are built from the ground up as explicit security-token exchanges, with all the regulatory measures and controls that will entail. I also expect many existing tokens to increasingly fall under the definition of securities, as well as new projects and tokens being created with adherence to these new definitions.

The legal ‘grey area’ in which many unlicensed exchanges are still happily (and profitably!) operating will continue to shrink.

2. Institutional involvement in the cryptocurrency market

There is already plenty of institutional interest in the market; a lot is happening in the OTC market behind the scenes, for example, and the day trading space is becoming increasingly automated by specialist hedge funds. Now that it’s clear that crypto is here to stay, we will increasingly see larger pools of money beginning to get involved. Whether pension funds or asset managers, endowments or family offices, in the future I expect the question will not be a matter of ‘who is’ investing in crypto, it will start to become a question of ‘who isn’t’ investing in crypto. While the risk-reward profile of bitcoin and other blue-chip cryptocurrencies remains asymmetric, I think it will increasingly become seen as irresponsible of a fiduciary or fund manager to not put at least 1–2% of allocation into this emerging asset class. The arrival of ever-more instruments such as futures, ETFs, Security Tokens, and even fixed-income crypto-securities will accelerate this trend.

3. The halo effect of industries being built around blockchain

Just as the protocols of the early internet (TCP/IP, SMTP, FTP) were the building blocks for a wide range of emergent applications and uses — ultimately the global internet phenomenon that we see today — so is blockchain forming the building blocks for the next revolution.

While existing familiar industries are busy (and wisely) trying to understand, pilot, and adapt applications of this technology to their empires, meanwhile brand new industries are quietly starting to emerge. This is what I call the ‘halo effect’, whereby the world starts to realise and develop applications of blockchains and distributed ledgers that were previously not possible, and whole new concepts begin to rise and capture our imagination.

In the short term, we can expect to see emerging industries directly spouting from existing ones: new hardware wallets, custody solutions, insurance solutions, KYC technologies, tax companies, escrows, professional services etc. However, looking further into the future, the potential second-order developments could change the way in which we operate.. What about robot forensic detectives? Smart-contract auditors? Self-sovereign charging stations? Machine-to-machine marketplaces? Mesh-networks (WiFi by-the-second)? Micropayment processors? Smart-economies? Crowd-sourced hedge funds? The list is endless.

To quote Bill Gates, we tend to overestimate what will happen over the next 2 years and vastly underestimate what will happen over the next 10. No-one anticipated in 1995 what sort of new paradigms would be enabled by decentralised knowledge. Now we have decentralised value to add to the mix.

4. The future of Stable Coins

Whilst Stablecoins aren’t a brand-new addition to the Crypto ecosystem, I do predict they’ll solidify their place in the market in 2019.

There’s a lot of discussion around their usage and future within the market and in my opinion, a lot of people simply do not understand why they exist. Some even invest in stablecoins erroneously expecting crypto-level returns, which completely misses the point.

Stablecoins are trying to harness the ‘best of both worlds’; relative lack of volatility of government-backed (fiat) currencies, coupled with the technological benefits of crypto-currencies, which include speed of settlement, ease of transfer, and notably,circumvention of sticky, legacy banking infrastructure. This presents some interesting applications. On the one hand, Stablecoins allow those exchanges without a license to handle government (fiat) currencies to nevertheless implement pseudo-fiat markets, with crypto-stablecoin trading pairs (e.g. BTC/USDT) acting very much like crypto-fiat pairs (e.g. BTC/USD). This allows traders to trade in and out of crypto markets entirely even if the exchange they are using doesn’t support non-crypto assets, because it allows them to hold balances of traditional cash assets like dollars or euros in the form of digital stablecoins.

A common question then is what’s the point of going to all this trouble to use stablecoins when you could just use a licensed exchange which supports balances of actual dollars or euros?

The answer is that stable coins are blockchain-compatible and therefore able to be used in smart contracts. Smart contracts allow for flows of funds to be automated based on business logic and triggers that can be coded and decentralised, running without the need for expensive solicitors or trustees. While this opens up a whole new world of automation, it’s a safe assumption that we won’t see the first widespread smart contracts transacting in bitcoin or ether. People will seek to harness the potential of ‘programmable money’ smart contracts without the unpredictable volatility of the underlying assets or funds, and this is the fundamental value proposition that will put stablecoins on centre stage as a base layer for the next wave of blockchain innovation.

One interesting development will be whether the several existing projects for stablecoins of the same denomination (e.g. USD) will eventually consolidate, continue to fragment, or be re-monopolised by Central Banks who are also looking at stablecoins very closely (see IMF Report).

5. The Rise of Proof of Stake

A common criticism of Bitcoin is the energy it consumes. The sink of this energy consumption is an unbounded global arms race to feed computation (or hashing) power to Bitcoin’s consensus mechanism (known as ‘Proof-of-Work’) by miners that compete to find the elusive block solution and hence newly-created bitcoins.

Proof-of-Stake (PoS), as opposed to Proof-of-Work (PoW), is an alternative consensus mechanism that isn’t based on hash-based mining, and as such is greatly more energy-efficient, resulting in PoS being widely argued as a good alternative model for securing cryptocurrency blockchains.

Typically PoS blockchains haven’t been widely adopted due to their own different inherent flaws (inc. so-called ‘weak subjectivity’, ‘long range attacks’, or ‘zero opportunity cost’ problems). Recently however, a new generation of Proof-of-Stake projects have appeared, which build on previous lessons to be more carefully and elegantly designed in order to resolve or iron out most of these issues.

Projects such as Tezos are a good example, which not only seems to have considered and fixed the main objections to PoS, but it has already awakened investors to the wonders of staking rewards. Unlike PoW chains (such as bitcoin), where these days mining rewards are exclusively the purview of specialised facilities with millions of dollars of equipment, with PoS chains (such as Tezos) rewards become obtainable to anyone and everyone who owns coins. In such a scheme, the average Joe need only offer up his coins as a sort of collateral, and they can participate in the verification process needed to add new blocks to the chain. In this way, they can receive fresh new tokens as a ‘reward for being honest’, and they can do this while remaining in full possession of their funds; they don’t need to lend them elsewhere. In return they can earn compounding interest (Einstein’s ‘8th wonder of the world’).

Moreover, users can earn this compound interest denominated in crypto, not fiat. This means if the price of the token goes up in fiat terms, so does your regular income. This delightful reward scheme is a powerful incentive, as now we can own cryptocurrencies that earn a yield, which is just another step towards acceptance as a serious asset class.

My expectation is that as people begin to understand and experience investment yield in crypto, this will spark a new wave of interest in Proof of Stake blockchains, with main beneficiaries being the newer generation PoS projects that have been elegantly designed to address some of the earlier flaws.

(disclaimer: I am an individual small investor in the Tezos project)

Andy
December 2018

The Chaotic Mechanisms of Scientific Revolution

It is the aim of this article to discuss the nature of scientific revolutions, and propose that not only are revolutions inevitable but that the direction of human development is no clearer now than it ever was in history. Thus is the chaotic nature of progress.

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