Section 5: Trend by cryptoasset class
When applying our original classification, A/I/F/O/P, to the cryptoassets that we assess as part of our in-depth analyses, we believe that using the functionality to classify crypto-assets is an appropriate approach. We have proved that the resulting groups of tokens are homogeneous, and the logic makes perfect sense. Irrespective of whether this classification gains acceptance, we will continue to base our analysis on it in future issues of Blockchain Quarterly.
However, in practice, we have recognized that we need to introduce a sixth functionality/characteristic to refine our classification of crypto assets: E vs Ē, which stands for “Execution environment”.
This addition is primarily intended to refine the “Infrastructure” component; in short, we need to make a distinction between DLTs that merely introduce a unit of account simultaneously with the deployment of the blockchain, from the platforms that provide an environment for logic execution attached to the ledger, i.e. a state machine coupled to the client software, that runs on every validating node of the network.
Let’s now review each functionality separately (that are then combined, depending on the crypto-asset).
A – ANONYMITY CHARACTERISTIC
As expected, some jurisdictions, including US State Texas and France, have started to voice their concerns about privacy-oriented coins. It will probably not be long before actual bans are announced. This is, of course, a big concern for crypto in general.
However, the situation is likely to be interesting because it is undetermined.
On the one hand, the acquisition and trade of these crypto-assets will be more difficult. At the extreme, exchanges may be obliged to delist such tokens to retain their licenses. Therefore, the demand for anonymous cryptocurrencies will be negatively affected, and the public may avoid these cryptos altogether.
On the other hand, the appeal due to its unique functionality will still be there, and several applications will need them to work properly; not the least being illegal activities, of course. However, as the cypherpunks’ vision was always to allow individuals to escape from the control of the government and big corporations, obviously a fraction of the population will still have an appetite, and there is no doubt that alternative ways of exchange will emerge. So, these crypto assets will continue to exist and gain traction, if only because of being outlawed.
People still like cash for a variety of reasons: for instance, if one does not appreciate merchants and marketers tracking them each time they purchase something, then using cash is a sure way not to be personally associated with buying patterns in their databases. Alternatively, if a person is comfortable purchasing a product that others would deem embarrassing or even shameful, even if not illegal – there is no reason to take this freedom away.
To sum up, there are several situations where traceability is problematic, and when some people prefer to use good-old cash. And anonymous cryptocurrencies are what comes closest to it.
(I)E – INFRASTRUCTURE (EXECUTION ENVIRONMENT) PLATFORMS
Let us make a comparison between existing DLT infrastructure platforms to illustrate in detail state of the art using various relevant parameters (refer to the table below). Some comments regarding this panel:
Consensus mode is important only as long as it allows a high throughput rate with fast confirmation. In this respect, PoW is not suitable (in addition to being statistically found), and most PoSs is also too slow, especially Ethereum, even post-scaling. Practical Byzantine Fault Tolerance and Federated Byzantine Agreement provide the best results, if one does not want an approach with some sort of delegated PoS – which, when implemented, often leads to degradation of decentralization – or a fully permissioned distributed ledger.
Even for highly scalable solutions, “scaling to infinite” is a continuing concern. Having a ceiling is restrictive for business applications, and currently only sharding / side-chains / Lightning Network / off-chain accounting is solutions. They all equate to registering transactions and running logic on a separate blockchain that is anchored to a higher one, in a pyramidal architecture; this can work well, but only if the interaction between participants can be segregated.
The quality of the execution environments offered by the various platforms is very heterogeneous. Some rudimentary solutions that are merely consensus engine do not have built-in space for code execution (Tendermint). Apart from Ethereum’s Solidity, it is a drawback for a platform to have its own specific language; this, in turn, is directly linked to the size and dynamism of the community around the platform.
Management of confidential data is a continuing concern and will probably remain so for the near future, with no practical solution available for industrials to use, except when it has been formulated from the beginning, e.g. in Corda’s approach.
I(Ē) – INFRASTRUCTURE FUNCTIONALITY
All of the trends that were highlighted in the previous Quarterly are not only still valid, but are increasing in significance:
Bitcoin acceptance is increasing. A list of cities where BTC is accepted for retail purchases includes: Prague, Buenos Aires, San Francisco, Madrid, New York, Amsterdam, Bogota, Vancouver and Paris, in this order.
The volatility of BTC continues to be consistently decreasing.
Evolution of the lifespan of unspent transactions suggests that holder activity is increasing.
“Altcoins” have been more positive than Bitcoin in recent months, in the context of a promising trend reversal, but are still mired in deep uncertainty. How to interpret this is unclear; it depends on how you want to look at it. Somehow, the paths of asset classes have separated; the correlation among crypto-assets is easing. If this is confirmed in the next few months, then the ground lost by Bitcoin, with respect to its overall dominance, is both an opportunity and a concern. A concern because it can no longer be seen as an indicator that the crowd of altcoins will imitate its major moves. An opportunity, because it would be possible to take positions with limited concern that the movements of grand-daddy Bitcoin would harm legitimate significant or promising projects. The truth ultimately might be somewhere in the middle.
An individual, Craig Wright, is claiming that he is Satoshi Nakamoto. As he is unable to prove it by simply moving some Bitcoins originally mined, the community could not be more critical of his claim. Indeed, it appears highly likely that this individual’s claim to be Satoshi is not legitimate, however, Wright, who was behind the Bitcoin Satoshi Vision fork, is now actively suing some doubters who denied his claim.
F – FINANCING FUNCTIONALITY FAMILY
“Utility Tokens” 2017-Style Icos
A lot of critics continue to express negative views on ICOs, despite the fact that the movement continues. One way to look at it is to admit that utility tokens are the real invention brought about by blockchainbased financing.
Indeed, transitioning securities to a DLT support is positive; there is no doubt that it will revolutionize asset management jobs; fund managers will have to reinvent their processes, and a lot of automation will be introduced, etc. But in principle, not much will change: the rights and duties associated with tokenized securities will remain the same; further, the implementation of KYC and other constraints will have to be transposed on chain, which makes it practically impossible to offer them on decentralized exchanges, at least for primary offerings.
On the other hand, the variety of utilities that can be attached to an ICO token is opening up a new range of possibilities, with an easiness to manage never before envisioned This is why we continue to see so many projects going that way.
Another way to look at it is that even the notion of crowdfunding is addressing a need in the financing world. Today, young entrepreneurs that have a very good idea and want to reach for their dreams have an alternative to the conservative, codified process of VC / PE. ICOs are a great way to shortcut this, and provide access to funding for great projects that have no support from traditional financing bodies. The high risk remains, of course, but is supported by a crowd instead of by a few bigwigs.
What we can say is that the principle still has definite interest. Naturally, apart from Binance, the model still has to demonstrate that it can fly in general, i.e. deliver a superior return to investors, with a successful platform, as most of the proposed utilities are complicated for investors to understand and evaluate, and also for businesses to implement. However, we would not bet that no utility token will prove to be a success, and that all utility tokens will disappear.
Security tokens offerings
STOs are reported to have increased by 130% in the first quarter of 2019, compared to the last quarter of 2018, again showing a reversal of the trend of 2018.
Data shows that, of almost 50 cases, 11 were in the US, 4 in Switzerland.
Every day that passes brings news of some regulators working on a framework for STO; Hong Kong, Mauritius, USA, Thailand, Switzerland, etc. Nobody serious enough about remaining a financial hub can avoid proposing a legal approach to securities on blockchain. We have always said that, regarding DLT applications, if only one was meant to succeed it would be a transposition of stocks and bonds as on-chain-managed assets. This always appeared as inevitable to us, and there is less doubt than ever that it is coming.
Initial Exchange Offering (IEO)
This is not a new phenomenon, but one that is receiving some recognition: instead of offering tokens through an ICO, getting the help of exchange like Binance to offer the token to the public initially is clearly an easier way to go.
This has many advantages: for the investor, it indicates that the participating exchange has conducted at least basic checks to ensure it is not a scam; all the KYC requirements would have been addressed, thanks to the standard procedures of the exchange. This is far less hassle for the fundraising team, and also addresses the concerns of investors.
We do not hear much these days about airdrops, however the practice has not disappeared. The approach to raising funds and engaging a community through the distribution of free tokens continues to be practiced.
Various engagement schemes exist; not only are on-chain mechanisms still common practice, but registering before requesting tokens is being
used more and more by young companies and foundations to register users and know who their stakeholders are.
O – ASSET OWNERSHIP / CONCRETE ASSET REPRESENTATION
Tokenization of assets is a whole subject in itself. Let us review what is going on by asset class. [For securities, please refer to the earlier “STO” paragraph.]
It must be highlighted that, for a physical asset that is unique, such as a collectible, the subject of tokenization can be separated into two parts: the fractionability of ownership on one hand allows crowd-ownership (and the crowd receives the profits), and on the other hand, traceability.
“Prop-tech” young companies are gaining momentum, as more and more real estate tokenization projects come to maturity.
A 3-million-euro real estate development (a restaurant + 18 apartments) has been sold in Switzerland using blockchain. The development was implemented on the Ethereum blockchain, and was paid for using tokenized Swiss Franc. So, while technically interesting, it is a significant additional sign of tokenized fiat being utilized in an actual application, and real estate embracing the transfer of property titles to the blockchain.
Tokenized real estate is considered a security in the US and elsewhere; this is a clear fact. Entering into this business requires coping with the very stringent impositions that are in place – at least for now.
Other attempts at real estate tokenization have been made on R3’s Corda.
Commodities, including precious metals
Tokenized gold is not gaining huge traction these days, but it seems to be doing a good job of tracking the gold price. In principle, it is demonstrating that the approach holds, even if tokenized gold is not yet commercially ready.
The CEO of a Russian nickel and palladium mining and smelting company plans to create a cryptocurrency backed by palladium through a Switzerland-based fund. In other words, palladium could be used as a crypto-currency, thereby generalizing the precious metal tokenization principle even further. Always an interesting topic to follow!
Loyalty program points
Various projects have been launched based on loyalty programs. As with many other cases, it is difficult to keep track of all of them, but FNB-protocol and Smathium are among the latest reported.
Artists and athletes’ careers
The idea is good and some initiatives continue to explore the opportunity: Ikisport is one of them; a French initiative, focusing primarily on tennis players.
Collectibles (art, luxury, historical objects, etc.)
The tokenization of the Warhol painting that we highlighted in the previous Quarterly obviously had a big impact in the art world. A lot of actors have been impressed and commented on that. If blockchain is able to change the art business, then really there is unlikely to be an area that will not be impacted! No doubt, many actors are now looking at how they can do the same.
P – PAYMENT FUNCTIONALITY
Let’s try to evaluate the dynamic of the monetary mass that results from the payment function of pure cryptocurrencies.
First, let’s acknowledge that cryptocurrencies are likely to exist along with official fiat, at least for non-anonymous cryptos, and that they will have some value because this is required for the network to continue run and be secure. The question is, what is the monetary mass that will result from the usage across many countries, and the total value
from individuals who believe it is stronger or safer than fiat, and who want it to serve as a means of payment?
To answer this, we have to consider the value represented by the total amount of paper notes and coins that are currently circulating on the planet, which is estimated to be 10 trillion euros. Then we have to add the value of “narrow money” that is held by people in their checking deposits. Then we have to estimate the direct payment monetary mass that is used today, which amounts to another 20 trillion euros, giving a total of 30 trillion euros.
What percentage of this total is likely to be served by pure cryptocurrencies, anonymous or not? This is difficult to estimate, of course, however, even if it is just 10%, the market cap will be in the region of 3 trillion euros. Compared to today’s 150 billion, there is a substantial room for growth.
In the next Quarterly, we will discuss, by cryptoasset class, what can reasonably be expected in terms of ultimate market capitalization, if the recent run of price increase is confirmed over the next few years.