A brief 15-year history of cryptocurrency: Looking for mature applications on the road accompanied by bubbles
Original author:polynya
Original compilation: Deep Chao TechFlow
As the time comes to the end of 2023, various media and institutions have begun to look forward to and expect 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 on the brief history of encryption, there may be new discoveries.
Cryptocurrency has been around for 15 years and is now a valuable and mature field. In different market cycles, cryptocurrencies are exploring different areas. In this article, I will mainly introduce my personal views on various market cycles of cryptocurrency.
2009-2013: Payments, Reserve Assets and Stores of Value
The first impetus for Bitcoin was two-fold. The first is digital payments or digital cash, and the second is new reserve assets. The latter attracts anarchists, anarcho-capitalists, doomsayers and Austrian economists. These people have grandiose visions that Bitcoin will become the new global standard asset. This is as ridiculous as the Imperial Japanese soldiers 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 ushering in the most prosperous and innovative era of human civilization. In fact, these incredible advancements made the advent of Bitcoin possible.
The bigger problem, however, is that the current global monetary system requires significant subjective investment that is not possible with the objective exclusivity of a public blockchain. The COVID-19 pandemic is a great example, when the global economy shut down overnight. The so-called Bitcoin standard would actually cause the global economy to collapse, impoverishing all but the richest 1%. Considering the scale of the epidemic, it is commendable that people around the world have weathered this outbreak relatively unscathed, much better than previous pandemics that took decades or even a century to recover from. Of course, its far from perfect - inflation is quite severe in 2022, and it will probably take a few more years to stabilize to pre-COVID levels - but overall, were getting better at macroeconomics.
The other side is payments – which attracts more tech and internet pioneers. At the time, digital payments were still a huge potential market. However, Bitcoin has some major problems - high volatility, lack of scalability, and poor user experience. At the same time, financial technology is rapidly iterating. Asia is leading the way and today there are multiple payment apps offering free, instant transactions and a flawless user experience. India in particular has an ideal solution, incorporating a global standard (UPI) between which its hundreds of applications and thousands of banks can interoperate seamlessly. In fact, UPI is being adopted outside India. Cryptocurrencies still have a place in the payments space, but we’ll discuss that in the next section.
By the end of this era, it is clear to most that neither global reserve assets nor payments are realistic - but something else is, an alternative, non-sovereign store of value. It can be said that this is a new era of digital gold. This was extremely 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” being developed were “Bitcoin killers.” But a new category is emerging — what if blockchain was used for more than just money?
Initially, this resulted in application-specific blockchains. The first one I knew about was Namecoin. In 2014, we launched BitShares, which pioneered several new technologies and features:
Delegated Proof of Stake
Decentralized exchange
Meme and NFT
Algorithmic Stablecoin
User issued assets
Free transactions, high TPS; at the expense of high system requirements, so unlike Bitcoin, less verifiability and decentralization
Later, the BitShares codebase was forked into Steem, which expanded the blockchain into social networks. Of course, this proved unsustainable.
However, the breakthrough innovation of this era was the 2014 Ethereum white paper. It lists nearly every application that ultimately finds lasting product-market fit. The main issue with applying a specific blockchain is maintaining long-lasting economic security. In fact, almost all L1s from 2012-14 have depreciated in value and have very limited financial security. The only reason they werent constantly under attack was because there was nothing on these ghost chains to attack.
Ethereum provides an elegant solution to this problem, letting application developers deploy on Ethereum rather than launching their own blockchain with their own security budget. This has led to a huge boom in the blockchain ecosystem, far beyond the scope specified in Ethereums 2014 white paper.
This all culminated in the ICO mania of 2017-18, but it turns out that 99% of applications are pointless on the blockchain.
In this era, Bitcoin has established strong product-market fit as an alternative store of value. Perhaps the most important thing is the block size war. In the end, small block Bitcoin won, emphasizing the need for end-user verifiability. By this time, the big players also realized that Bitcoin’s first use case, an alternative store of value, didn’t actually require scalability. Therefore, it is wise not to compromise on decentralization and security.
2018-2021: Finding product and market fit beyond alternative storage value
While 99% of crypto projects during the ICO mania proved useless, there are areas beyond alternative stores of value that have found product-market fit. Not surprisingly, all of this was described in the 2014 Ethereum white paper.
At this point, fintech payment apps have become ubiquitous in many countries, particularly in Asia, where the majority of the worlds population lives, a trend accelerated by the COVID-19 pandemic. However, there is still strong demand for stablecoins in some areas, 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; 3) As a store of U.S. dollars, or in transactions Transfer between offices. There are of course smaller areas, but these are the main three.
DeFi applications have proven valuable. Although they are very limited and inefficient relative to traditional finance, they have found a market worth billions of dollars. Identity applications have also found use, especially ENS.
NFTs have always been considered an important use case, but the 2014-2015 discussion and Ethereum white paper underestimated the rise of collectible NFTs. If Bitcoin is digital gold, then collectible NFTs are works of art used by the wealthiest people as alternative stores of value. The overall financial impact of NFTs may be relatively small and only relevant to the top 1% of wealthy individuals, but it is still an enduring use case. There are certainly other areas, but most turn out to be very small markets.
This is an era of effectively solving scalability problems, or at least thats how the research goes. New technologies such as validity proofs, fraud proofs, and data availability sampling promise to enable near-infinite scale so that scalability does not become a bottleneck.
As Bitcoin enters its maturity phase, it has seen strong growth but also severely diminished returns. Thanks to an overhaul of the economy and expanded utility, Ethereum has also matured as a true alternative store of value.
2021 to Present: Market Divides into Mature and Fallen
In fact, starting in 2022, we have seen countless L2 and L1 come online, but almost all of them are not widely used. While usage is growing, it lags far behind the actual scale of growth. I expect that in the next few years, new technologies such as validity proofs and data availability sampling will enable nearly unlimited scaling that is not possible with monolithic blockchains. Conversely, this era is also the first time we see stagnation at the application layer, and it is not yet clear what will saturate the coming near-infinite scale. There is always something - the question is, is it valuable, is it meaningful? Or just more spam and bloat?
We also see an immediate fragmentation of the market. A segment of the market doubled down on the depravity. In the past, speculative bubbles have been cloaked in narratives, but starting in 2021, they have taken off their disguises - and there are obvious Ponzi schemes everywhere. In fact, this situation continues until 2023, as speculation returns to the market. Although the cryptocurrency space is maturing, the loudest narrative in crypto remains that of an apparent Ponzi scheme.
Behind the scenes, however, there is an industry that has entered a stage of maturity. Bitcoin and Ethereum are established as alternative stores of value worth hundreds of billions of dollars. Over $30 billion in stablecoins are settled between Ethereum/L2 and Tron every day. Decentralized finance, Web3 identities, and NFTs continue to find sustainable markets. Although speculation is the dominant narrative in cryptocurrency 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. All product and market fit was described in the 2014 Ethereum white paper and discussed in 2014-15. Some things have been more successful than expected (collectible NFTs) and some less so (payments, prediction markets), but overall the industry has found strong product-market fit in several areas and is moving into mature stage.
Of course, speculation and Ponzi will always be the most important part of cryptocurrency and this will continue in waves. If this is your thing - then have fun. If not, take your attention away from the noise and focus on the maturing aspects of cryptocurrencies.
What I would like to see in the future is the integration of product market fit, sustainable scaling solutions using mature technologies such as proof of validity, and more applications with smooth user experiences that have well thought out use cases rather than vague of ambition and bombast. I wish there was less noise and less speculative bubbles in the market, but lets face it - thats never going to happen.
