Coming to the end of a tumultuous year that few ever saw coming, we now want to know the future through a good crystal ball. What hot blockchain and cryptocurrency trends of 2020 will continue shining brightly, and what might be the curveballs? Forkast.News consulted a number of top leaders, thinkers and other oracles of the blockchain world for their predictions.
1. DeFi: bubble or sustainable growth?
If there’s one big takeaway from 2020, it’s that decentralized finance (DeFi) is — as Buster Poindexter would declare — “hot hot hot.” But it wasn’t always this way for DeFi as an industry. Stefan Rust, founder and CEO of Sonic Capital, told Forkast.News: “it’s been in the making for four years.” This summer, as DeFi grew exponentially, yield farming and decentralized exchanges (DEXes) also exploded in popularity.
Uniswap, one of the most prominent DEXes, underwent a meteoric rise, starting off the year with a total value locked (TVL) of not quite US$12 million and peaking at over US$3 billion in November. While not quite as dramatic, the DeFi space as a whole has also followed an upward trend. On Jan. 1, total value locked in DeFi clocked in at US$675 million. Not quite a year later, as of the third week of December, the number had risen past US$16 billion — for a growth rate of over 2,300%.
Another sizzling area in DeFi is crypto loans, which comprise three of the top 10 largest DeFi platforms by TVL (to DEXes’ four). The current top DeFi platform as of time of writing also belongs to the lending category: MakerDAO. A decentralized credit platform hosted, like most DeFi projects, on Ethereum, Maker had a TVL of US$2.843 billion on December 1st — 19% of global TVL.
What does this mean for DeFi in the year ahead? According to Piers Ridyard, CEO of Radix, the first layer 1 protocol for DeFi, “[2021] may not feel like as big a year as this one did for DeFi, and the hype may die down a bit, but the actual progress being made will make it DeFi’s biggest year yet.”
The flurry of development and the resulting congestion on Ethereum exposed the blockchain network’s shortcomings, opening the doors to new rivals and platform development wars — setting the stage for more efficient and effective protocols in the future.
An improved ecosystem would lead to DeFi apps becoming “easier and cheaper to build, secure, and scale,” Ridyard told Forkast.News.
Beyond progress in DApp development, DeFi’s popularity can mean greater financial inclusion, improved financial privacy, and the democratization of finance, DeFi proponents say.
All this suggests that this boom that we’ve been seeing in DeFi is not just a bubble about to pop. But others say the divide between institutional investors and others who are skeptical of this new financial technology must be bridged if DeFi is to sustain its momentum and continued growth.
Ridyard predicts: “We won’t get there in 2021, but it won’t be long before established traditional finance players will have to make a decision about how they might co-opt DeFi without getting co-opted, like media and music publishers did before them in the age of the internet.”
2. Time is ripe for more regulations
Growth cannot continue forever. As Rust of Sonic Capital puts it, DeFi will become “defy.” The community has taken considerable care to establish frameworks to accommodate growing demand. Regulators and governance will have to reckon with these “incumbents” as they try to come to grips with the nascent space, likely resulting in “a big sort of defiance” between the two groups of actors.
Regulatory clarity is a state of mind that has long eluded much of the crypto world. But in 2021, the industry will likely see government agencies and other regulatory bodies take action. As Sheila Warren, Head of Blockchain and Data Policy and Member of the Executive Committee for the World Economic Forum, told Forkast.News, apply “a little more rationality [] to the DeFi space.”
Regulations can cut either way. Countries such as India with a recent history of ambivalent stances towards cryptocurrency could take actions that impede the industry’s growth, and crypto companies have reason to be wary of a tightening regulatory environment that could put a halt to their work overnight. Consider the U.S. crackdown on BitMEX and what China recently did to OKEx as cautionary tales for crypto exchanges.
Even in crypto-friendlier nations, “some of the areas that have been… really gray for a long time. I think we’re going to concretize some of that and I think that’s going to be really dramatic for the industry in terms of having a final answer to some of the questions that we all have,” Warren said.
Increased regulatory scrutiny and oversight could constitute problems for other crypto areas as well. Anton Mozgovoy, co-founder and CEO of Holyheld, a DeFi financial service, identifies stablecoins as a particular area of interest that will surely see “regulatory pushback.”
It took five years for the stablecoin supply to reach 6 billion. It took only four months after that for the supply to double to 12 billion, in the wake of the March crypto crash earlier this year. Hard on the heels of the stablecoin boom, the Financial Action Task Force (FATF) issued a cautionary statement. One can expect that given the continued growth of stablecoins — from a total market capitalization of little over US$5 billion at the start of 2020 to US$26 billion at time of writing — regulatory agencies will likely be paying more attention than ever.
3. Everything gets tokenized
Where there used to be only bitcoin, there are now countless tokens ranging from governance to utility to security tokens and more — what Rust calls a latter-day “Cambrian Explosion” that will result in the “tokenization of the world.”
Mance Harmon, a co-founder of Hedera Hashgraph, predicts that this proliferation of tokens, in combination with DeFi and “componentized” finance, will “set up the market for enterprise adoption in 2021.”
Should this prove true, the market would be wise to prepare to participate in the token economy. A report by Deloitte concludes, “tokenization is already a reality… Only institutions that engage with the technology, plan for the future and adapt to the realities will thrive.”
Certainly there have already been inroads into the idea in many markets. Gold, for example, has been tokenized in an effort to reduce the kind of systematic accrual of risk that contributed to the 2008 financial crisis. Tokenization has extended to illiquid assets as well, lowering the barrier to entry for assets such as real estate.
Non-fungible tokens, which make a digital item unique, are already being used in video games, collectible virtual pets and even fine art, including a Picasso. 2021 should expect to see even wider applications of NFTs and tokenization.
“If Covid has taught us anything, it’s that markets can function without so much human intervention,” Alan Silbert, Executive Managing Director of digital assets trading platform INX Limited, told Forkast.News. “Tokenization takes this to another level. While the first half of 2021 will be one of education, the second half will see a swelling of companies taking the digital jump.”
Read more on the rise of tokenization here.
4. Increased momentum for CBDCs
Reports on China’s latest trials of its new digital currency, the Digital Currency Electronic Payment (DCEP), continue to flow out of the country. The country’s massive population and near-total control of its economy give the People’s Bank of China ample opportunity for use cases such as distributing 20 million digital yuan to 100,000 lucky residents of Suzhou in the latest phase of its testing process; doubling the size its last test involving 10 million digital yuan and 50,000 people in Shenzhen.
Harmon of Hedera Hashgraph notes: “I think that what China is doing with the BSN, the Blockchain Services Network and the CBDC efforts, that they are literally a step or two or maybe three ahead of most of the rest of the world in terms of their DLT focus and efforts, and that is being noticed.”
The momentum of other CBDCs around the world is thus being spurred by China’s developments and the geopolitical implications. Central banks around the world are now in a race to develop their own digital currencies.
“China’s CBDC was really kind of creating some peer pressure here in the region,” Charles D’Haussy, a director of Consensys in Hong Kong, told Forkast.News. “And we’ve seen as in HK, they’re working even harder on their CBDC. The Bank of Thailand is also. There is also great work in Singapore with the MAS. Consensys is involved with the project in Australia as well. So CBDCs are really pushing forward and it’s a big shift in the industry.”
As more central banks look into developing their own CBDC, it’s worth contemplating the implications for financial service providers. John Deacon, financial services lead for Dragon Infosec, a cybersecurity and cryptography company, asserts that “central banks will be looking for ways to prevent the disintermediation of private sector banks — for example, by restricting access to the CBDC itself to interbank clearing, but permitting banks to create their own retail-level stablecoin backed by the CBDC. This would finally create a digital payment leg for digital transactions, and drive banks to up their game in digital offerings.”
The coronavirus pandemic has already accelerated the digitization of all things this year. Expect even more of it — especially in finance — in 2021.
Douglas Borthwick, chief marketing officer of INX, predicts: “For 2021 we see the beginning of a digital migration[:] equity listings on current legacy exchanges beginning to migrate to digital exchanges, where the costs of being a public company are significantly less than current, and the benefits are extraordinary: 24/7 trading, and cap table management in real time. 2021 is the year that legacy migrates to digital.”
5. Asia rising
China’s new DCEP digital currency is just one of many projects that make Asia a space to watch in when it comes to blockchain and related areas, such as digital ledger technology. Aside from the DCEP digital yuan, China’s blockchain innovations in supply chains stand to both disrupt and secure the industry globally.
India’s demand for regulatory clarity may come sooner rather than later as parliamentary sessions resume. Its crypto industry has already seen massive growth in the wake of the overturning of the Supreme Court’s crypto banking ban earlier this year. Then there’s the industry’s move towards proof of stake.
“Asia is the center of mining when it comes to bitcoin or proof-of-work with Ethereum, and I think that the switch of the technology from proof-of-work to proof-of-stake will keep a strong leadership position with Asia,” D’Haussy said. “I think the staking capital of the world will definitely be in Asia, should it be China, Japan or somewhere else. But with Ethereum 2.0, Filecoin, Tezos and that — staking loves Asia.”
Tokenization, too has been welcomed in Asia. The Covid pandemic has led to many galleries and exhibits turning to online shows, including in Hong Kong and New York. A natural next step is using blockchain technology to allow for fractional ownership of artwork, an idea that could be a boon for artists and galleries to increase sales.
D’Haussy predicts that “25% of Asian banks [would] offer digital asset custody (as a start) in 2021.” This prospect, in combination with “major Asian exchange acquisition in 2021,” will lead to Asia further leading the world in blockchain adoption.
The World Economic Forum’s annual meeting moving from Davos to Singapore next year is demonstrative of the organization’s regard for Asia as, in Warren’s words, “a gigantic place of innovation, a front of innovation.”
For more expert insights into what lies ahead for cryptocurrencies and blockchain, check out Forkast Forecasts — a special series featuring the reflections on this year and predictions for 2021 from the industry’s visionaries, leaders and thinkers.