At the end of 2023, various media and institutions have begun to look forward and look forward to the new year.
But while looking to the future, don't forget the way you came.
At this point in time at the end of the year, looking back at the brief history of crypto, there may be new discoveries.
Cryptocurrency has been around for 15 years, and now it is a valuable and mature field. Different market cycles, cryptocurrencies are exploring different areas, in this article, I will mainly introduce my personal views on the various market cycles of cryptocurrencies.
2009-2013: Payments, Reserve Assets and Stores of Value
The first impetus for Bitcoin is twofold. The first is digital payments or digital cash, and the second is new reserve assets. The latter attracted anarchists, anarcho-capitalists, doomists and "Austrian economists". These people have grand fantasies that Bitcoin will become the new global standard asset. This is as ridiculous as the soldiers of the Imperial Japan in the 60s who were convinced that the war was still going on and that they had to fight for the emperor. The world has evolved, and modern monetary policy has achieved great success in leading the most prosperous and innovative era of human civilization. In fact, these incredible advancements made the emergence of Bitcoin possible.
The bigger problem, however, is that the current global monetary system requires significant subjective inputs, which are not possible for the objective exclusivity of public blockchains. The COVID-19 pandemic is a case in point, when the global economy shut down overnight. The so-called "Bitcoin standard" would actually lead to the collapse of the global economy, and all but the richest 1% would be impoverished. Given the scale of the pandemic, it is commendable that people across the globe have survived this pandemic relatively unscathed, which is much better than the pandemics that took decades or even a century to recover from in previous centuries. Of course, this is far from perfect – inflation in 2022 has been quite severe and may take a few years to stabilize to pre-COVID levels – but overall, we're getting better at macroeconomics.
On the other hand, there is payment – which attracts more tech and internet pioneers. At the time, digital payments were still a huge potential market. However, Bitcoin has some significant issues – high volatility, lack of scalability, and a poor user experience. At the same time, fintech is iterating rapidly. Asia is leading the way, and today, there are multiple payment apps that offer free, instant transactions, and a flawless user experience. India, in particular, has an ideal solution that incorporates global standards (UPI) and its hundreds of applications and thousands of banks that can be seamlessly interoperable between them. In fact, UPI is being adopted outside of India. Cryptocurrencies still have a place in the payments space, but we'll talk about that in the next section.
At the end of this era, it was clear to most people that neither global reserve assets nor payments were realistic – but there was something else that was realistic, an alternative, non-sovereign store of value. It can be said that this is a new era of digital gold. This was very successful and remains the number one use case for Bitcoin to this day.
2013-2018: Exploring crypto applications
Around 2011-12, most of the "altcoins" in development were "Bitcoin killers". But a new category is emerging – what if blockchain isn't just for money?
At first, this gave rise to application-specific blockchains. The first one I know of is Namecoin. In 2014, we launched BitShares, which pioneered several new technologies and features:
- There is a delegated proof of stake
- Decentralized exchanges
- Memes and NFTs
- Algorithmic stablecoins
- User-issued assets
- Freedom of transactions, high TPS, and at the cost of high system requirements, so unlike Bitcoin, there is less verifiability and decentralization
Later, the BitShares codebase was forked into Steem, which extended the blockchain to social networks. Of course, this turned out to be unsustainable.
However, the breakthrough innovation of this era was the Ethereum whitepaper in 2014. It lists almost all the applications that will eventually be able to find a lasting product-market fit. The main problem with applying a particular blockchain is maintaining lasting economic security. In fact, almost all of the L1s between 2012-14 have depreciated and are very financially secure. The only reason they weren't constantly under attack was because there was nothing on these ghost chains to attack.
Ethereum offers an elegant solution to this problem, allowing application developers to deploy on Ethereum instead of launching their own blockchain with their own security budget. This has led to a huge boom in the blockchain ecosystem, far beyond what was set out in Ethereum's 2014 whitepaper.
It all culminated in the ICO frenzy of 2017-18, but it turned out that 99% of applications were meaningless on the blockchain.
In this era, Bitcoin as an alternative store of value has established a strong product-market fit. Perhaps the most important thing is the "block size war". Ultimately, the "small block" Bitcoin wins, emphasizing the need for end-user verifiability. By this time, the big players also realized that Bitcoin's first use case, alternative stores of value, didn't really need scalability. Therefore, it is wise not to compromise on decentralization and security.
2018-2021: Look for product and market fit that goes beyond the value of alternative storage
Despite the fact that 99% of crypto projects during the ICO frenzy turned out to be useless, there are still areas beyond alternative stores of value that have found a product-market fit. Not surprisingly, all of this was described in the 2014 Ethereum whitepaper.
By this time, fintech payment apps had become ubiquitous in many countries, especially in Asia, where the majority of the world's population lived, and the COVID-19 pandemic accelerated this trend. However, in some areas, stablecoins still have strong demand, becoming the second most useful crypto application. These areas include: 1) easy access to U.S. dollars in countries with unstable currencies and limited access to U.S. dollars, 2) cross-border payments to countries with weak financial infrastructure or strict capital controls, and 3) as a storage method for U.S. dollars, or transfers between exchanges. Of course, there are some smaller areas, but these are the main three.
DeFi applications have proven to be valuable. Although they are very limited and inefficient relative to traditional finance, they have found a market worth billions of dollars. Identity apps have also found a use, especially ENS.
NFTs have always been considered an important use case, but the 2014-2015 discussion and Ethereum whitepaper underestimated the rise of collectible NFTs. If Bitcoin is digital gold, then collectible NFTs are art that the wealthiest use as an alternative store of value. The overall financial impact of NFTs may be relatively small and only relevant to the top 1% of the wealthy, but it is still a lasting use case. Of course, there are other areas, but most end up proving to be very small markets.
This is a time when scalability problems are effectively "solved", or at least researched. New technologies such as validity proof, fraud proof, and data availability sampling promise to achieve near-infinite scale so that scalability doesn't become a bottleneck.
As Bitcoin entered its maturity phase, it saw strong growth, but also a severe decline in returns. Due to the overhaul of the economy and the expansion of its utility, Ethereum has also matured as a true alternative store of value.
2021-present: The market is divided into mature and degenerate
In fact, starting in 2022, we've seen countless L2s and L1s go live, but almost all of them are not widely used. While usage is growing, it lags far behind the scale of the actual growth. I expect that in the next few years, new technologies such as validity proofs and data availability sampling will achieve almost unlimited scale that is not possible with monolithic blockchains. Conversely, this era is also the first time we have seen the stagnation of the application layer, and it is unclear what will saturate the near-infinite scale that is coming. There's always going to be something – the question is, is it valuable, meaningful, or just more spam and bloat?
We are also seeing a direct differentiation of the market. A part of the market is doubling down on the fall. In the past, speculative bubbles were shrouded in narratives, but starting in 2021, they took off their disguise – obvious Ponzi schemes everywhere. In fact, this situation continues until 2023, with speculation returning to the market. Although the cryptocurrency space is maturing, the loudest narrative in cryptocurrency remains the obvious Ponzi scheme.
Behind the scenes, however, there is an industry that has entered a mature phase. Bitcoin and Ether were established as alternative stores of value worth hundreds of billions of dollars. More than $30 billion of stablecoins are settled between Ethereum/L2 and TRON every day. Decentralized finance, Web3 identity, and NFTs continue to find sustainable markets. Although speculation is the dominant narrative in cryptocurrencies today, it is still a multi-billion dollar market.
Looking to the future
While no one can predict the future, the evolution of cryptocurrencies is actually very orderly. The 2014 Ethereum whitepaper describes what all products fit into the market and discussed in 2014-15. Some things have been more successful than expected (collectible NFTs) and some have been less successful (payments, prediction markets), but overall, the industry has found a strong product-market fit in several areas and is entering a mature phase.
Of course, speculation and Ponzi will always be the most important part of cryptocurrency, and this will continue in waves. If that's your interest – then enjoy it. If not, take the focus off the noise and focus on the maturing aspects of cryptocurrency.
What I'd like to see in the future will be the integration of product-market fit, the use of technically mature sustainable scaling solutions such as proof of effectiveness, and more applications with a smooth user experience that will have well-thought-out use cases rather than vague ambitions and rhetoric. I hope there will be less noise and speculative bubbles in the market, but let's face it – this will never happen.