If 2017 was the year of the ICO, 2018 will be the year of the great ICO hangover.
It will also be the year major financial institutions adopt digital assets, and mark the birth of hybrid blockchains.
1. The death of the ICO token
"Cryptocurrency" became a major buzzword in 2017. Suddenly, all eyes
were on these new assets with speculators jumping into the market in
droves and regulators heavily scrutinizing them.
In fact, in early December, the combined market capitalization of all
digital currencies surpassed that of JPMorgan, the biggest U.S. bank.
Initial coin offerings (ICOs) similarly exploded, around the world in a matter of months.
While they made for exciting headlines, though, I expect the exuberance around ICOs to fizzle in 2018.
What's more, I also expect regulators and authorities worldwide to
come down hard on fraudulent ICOs in the new year. That's because many
ICOs skirted existing regulation in order to raise equity — with no
solid business to back up the offering. Funds raised from some of these
ventures have already started to disappear, and regulators, such as the
SEC, recently announced that they’re getting ready to crack down on
them.
I wouldn't be surprised to see hefty fines, litigation and even jail time for those standing on the wrong side of the ICO issue.
Beyond the regulatory crackdown, questions will arise around the
utility of special-purpose tokens. Why would a file hosting company
accept payment, when a general-purpose digital asset is so much more liquid and therefore easier to turn into fiat?
We
don't use different currencies to buy clothes or pay our mortgage in
the brick-and-mortar world and ICO token holders will realize the
economics are no different online.
2. Financial institutions will adopt digital assets
If speculators entered the digital asset market in droves last year,
2018 will be the year that major institutional players like asset
managers, pension funds and other financial institutions, such as
payment providers, enter the space.
We’re already seeing increased over-the-counter (OTC) trading of
digital assets, such as bitcoin on the Chicago Board Options Exchange,
causing liquidity across the market to deepen. It’s really a matter of
when, not if, listings of additional cryptocurrency futures on OTC
exchanges will take place. My bet? We’ll see the listings by next
summer.
Between this and new institutional players entering the market, I
think digital assets have plenty of room for growth. However, the crypto
space won’t be without its challenges. Forking, regulation, and banking
— oh my!
Governance issues will continue to plague some digital assets — causing forks such as the one with bitcoin and bitcoin cash.
This instability will be problematic for some who want to enter the
market as it raises questions about supply as well as the level of risk
involved.
The uncertain regulatory environment in the U.S., China and elsewhere
could also stifle further development of the digital asset market.
While countries like japan and Phillipines
have embraced digital assets in their economies and regulatory
frameworks, there are many more worldwide without clear policies and
laws for these assets.
They should take a page from the respective books of Japan and the
Philippines in order to enable new services, increase financial
inclusion, and lower barriers to economic growth.
For example, there are only a handful of financial institutions in
the U.S. that will bank businesses in the cryptocurrency space. If they
were to exit, or if regulation were to come through that prohibits
exposure to the digital asset market, this could have very serious,
adverse consequences on the improved services being developed. Banks
need clear guidelines from regulators on how they can lawfully bank
those associated with cryptocurrencies.
3. Blockchains will start to interoperate
In 2017, we've seen bitcoin's share of the cryptocurrency market drop
from 87 percent to under 50 percent. Hundreds of new coins and tokens
launched and are now being traded.
To make the broad use of digital assets truly mainstream, however, I
think we’ll need the many blockchain networks that currently exist to
interoperate. The truth is there will not be one single dominant
blockchain network in the future — just as there isn’t any dominant
internet or email provider globally today.
Currently, we can all email family, friends and colleagues from Gmail
to Yahoo to Outlook seamlessly and instantly. Value should move across
all ledgers in exactly the same way -— irrespective of the blockchain
network, PayPal wallet or traditional bank account involved.
Indeed, we've already seen efforts in 2017 to address blockchain interoperability.
Raiden, the ethereum interoperability solution for ERC-20 tokens, launched its tocken in September, while the Interledger Protocol (ILP) was used to connect several ledgers including bitcoin, ethereum and XRP in June. My money is (unsurprisingly) on Interledger.
If all networks were to become ILP-enabled, it ultimately wouldn't
matter if you held bitcoin, ether, litecoin or XRP. ILP would allow you
to make payments to a merchant that only accepts bitcoin, for example,
using XRP — all in just a matter of seconds.
4. The birth of hybrid blockchains
Until now we’ve seen a proliferation of both public blockchains like
bitcoin and private blockchains like Hyperledger Fabric. Going forward, I
think we’ll start to see the rise of hybrid blockchains, which combine
the best of both worlds.
A hybrid blockchain runs on the open internet and is accessible to
anyone like a public blockchain, but it uses a smaller set of validators
and is more targeted towards a specific use case like a private
blockchain.
Deploying an ethereum contract or creating an ERC-20 token will be
replaced by launching your own mini-blockchain, which can be tuned to
the exact needs of a given project.
Need more decentralization? Less? More powerful functionality? Should
it be upgraded frequently or remain very stable? One size doesn't fit
all, but next year you'll finally be able to choose.
This will be part of a larger trend for blockchain networks to
specialize. Current systems try to be everything to everybody. In the
future, we'll see more targeted implementations designed for a clear use
case. The best way to explain why this is necessary is to point to the
Yahoo example — a tech giant that spread itself thin across too many
products and services, and couldn’t be truly successful in any of them.
In the same way that Google focused on data, or Apple on design, I
think those blockchains that focus on one core offering (e.g. a pure
database like BigchainDB) will survive, and thrive.
5. Specialization or generalization — a contradiction?
Over the course of this article, I've argued that general-purpose
tokens will replace special-purpose tokens and I've also said that
special-purpose blockchains will replace general-purpose blockchains.
This might seem like a contradiction at first, but as blockchains
become more interoperable, blockchains and tokens will simply be less
coupled together. This transition will involve more growing pains, so
it's sure to be an interesting year.
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