Finding the Holy Grail 2.0 (Part 1)

Source: Bitcoin.com

This article is a continuation of “Why Invest in Blockchain” from October 2015 and “Finding the Holy Grail” from July 2018, when the price of Bitcoin was $245 and $7,880, respectively, and today, December 27, 2020, the price of Bitcoin is $26,964.

Prediction Review

In the article “Finding the Holy Grail”, I have made the following predictions:

1) Within 4 years, the total market capitalization of crypto assets approaches or exceeds that of gold, which is currently at $8 trillion. Credibility: 90%.

2) Within 4 years, the total market capitalization of the underlying tokens of a single smart contract platform exceeds $1 trillion. Credibility: 70%.

3) Within 8 years, blockchain-based mega-applications emerge, with the market capitalization of a single project exceeding $1 trillion. Credibility: 50%.

Let’s review them one by one.

The first one, that the total market capitalization of crypto assets approaching or surpassing gold by July 28, 2022, is significantly less likely to be realized. The speculative logic in the original article has been falsified: “From June 2011 to December 2017, a total of 78 months, the geometric mean of bitcoin price growth per month was 8.64%, so if we project the future based on historical increases, then the next four years are roughly 53 times higher, and the total market capitalization of bitcoin in circulation today is $140 billion, $140 billion * 53 = $7,420 billion, or $7.42 trillion.” However, as of today Bitcoin’s price is 3.4 times higher than it was at the time of writing, with a monthly geometric average gain of 4.33%, which is only half the average monthly gain for this period from June 2011 to December 2017.

The average monthly compound increase of 4.33% is already very, very impressive, but it does not maintain the original rate of the price increase.

Other digital assets have failed to maintain their original price increases, especially tokens based on smart contract platform, for reasons I will explore later in this article.

The second, the total market value of the underlying tokens of a single smart contract platform exceeds $1 trillion by July 28, 2022, is very unlikely to be realized. In the post facto attribution analysis, I believe the root cause is that the speed of technological progress is less than expected, which will be discussed in this article.

The third prediction, and one that was considered less credible at the time, is the most likely to come true and will likely be significantly earlier in time: a market cap of over $1 trillion for individual blockchain-based super-applications by July 28, 2026. The original article lists 3 potential super applications: a) algorithm-based stablecoins, b) Bitcoin, and c) cryptography-based identity systems. Today Bitcoin’s market cap is $501.1 billion, only half away from $1 trillion.

The world is a complex system, the future after a certain time span is unpredictable, short-term prediction of the general direction is still possible, but to predict the speed of development and evolution of things, it is really difficult. Yes, I am indeed looking for an excuse for the roughness of my prediction details. Although the time to achieve these three predictions must be adjusted significantly, I am still highly optimistic about the achievability of the three predictions.

The first part of this article will review the last 29 months and the future outlook of Bitcoin, as well as the development of the smart contract platform over the last 29 months.

BTC vs. ETH

In the past 29 months, between the publication of “Finding the Holy Grail” and today, Bitcoin has outpaced the development of smart contract platforms. The development, in this case, includes both productivity development due to increased utility and increased attractiveness simply due to changing perceptions. The smart contract platform is clearly in the former category, while Bitcoin is in the latter, meaning that the technological progress of the smart contract platform, represented by Ethereum, has been slower than the change in perception brought about by Bitcoin’s mere longevity. This is the basic point of the first half of this paper.

The development of the two is actually reflected in the price comparison of ETH/BTC, as shown in the chart below. At the time of the original article, the price of ETH/BTC was about 0.058, and since then the price has been much lower than this value until today, and today the price ratio is only 0.023, which is less than half.

During the 1 year or so before the original article was published, the competition between ETH and BTC was in a stalemate, when ETH was doing well after the community had successfully emerged from the hard fork quagmire caused by TheDAO event, and because of the advanced productivity of smart contracts, specifically because of the ICO frenzy brought about by the ERC20 token standard, which triggered the whole bull market in the crypto-asset industry.

On the contrary, the community of BTC has been in an atmosphere of potential hard fork triggered consensus collapse, especially in January 2018, when the ETH/BTC ratio peaked at 0.12 and the total market value of ETH approached that of BTC, and the total market value of BTC dropped to 37.8% of the crypto-asset industry, while the percentage of ETH rose to 31.1%. .At that time, there was a buzzword often mentioned in the community — Flippening (The Great Reversal), where ETH replaced BTC as the crypto industry leader. However, it has never happened so far. So, what has happened in the last 29 months?

What happened?

The external world

A) The COVID-19 pandemic has forced the world’s major central banks to print money at a massive and extreme rate. The chart below shows that the Fed’s balance sheet grew from $4.3 trillion to $7.2 trillion in just 2.5 months, an increase of nearly $3 trillion, bearing in mind that the Quantitative Easing in response to the 2008 financial crisis only printed $700 billion.

B) Accelerated polarization of wealth distribution. The great currency deflation rapidly pushed up asset prices and greatly boosted the number of assets of the top 1% of HNWIs; in contrast, the bottom 50% not only did not hold assets but also reduced their income due to unemployment. Such polarization between rich and poor exacerbates social discontent and makes it easier for people to embrace crypto-assets, which after all offer a new type of security when the old order gets worse.

What happened to BTC?

Not much seems to have happened, no major unexpected events, the most important being the implementation of the halving of production in May 2020 as expected by all. Bitcoin has not been aggressive on the road to productivity improvement, as shown by the fact that it has not adopted the large block solution advocated by forking communities such as BCH, but instead has chosen to continue to remain unchanged.

The unchanging nature of bitcoin, which brings the expectation of stability, is the biggest selling point, especially at a time when the old order is collapsing. Bitcoin’s inflation rate is about 1.8% after a successful halving in May 2020, and will drop further to 0.8% after the halving in 2024, below the 2% inflation standard generally accepted by central banks; on the other hand, the world’s central bank leader, the Federal Reserve, can issue an additional $3 trillion in just 3 months, with the M0 money supply rising extremely fast by more than 70%, while other central banks have also adopted similar extreme expansionary monetary policies, coupled with the extreme expansionary fiscal policies adopted by governments around the world, all of which are in stark contrast to Bitcoin’s stability.

In 2020, there was a qualitative change in perception, partly reflected in the fact that institutions started buying bitcoin in large quantities, from public companies to insurance companies, to various funds have disclosed their purchase of bitcoin, which actually reflects the change in perception of the top 1%, and we no longer see any celebrities coming out with a rant against bitcoin.

On the other hand, the changing perceptions of non-high net worth individuals can be seen in the percentage of the population that holds coins, according to the June 30, 2020 “Cryptoasset Consumer Research 2020” report released by the UK Financial Conduct Authority (FCA) “ report, the FCA estimates the number of people who have held crypto-assets in the UK as a percentage of the national adult population to be 5.35% by the end of 2019, compared to 3% the previous year, and if the growth rate remains the same, this should be close to 10% by the end of 2020. This is the case in the UK, while in the US, as of the end of 2020, there are several financial apps for mass users that have opened their crypto-asset investment business, including Paypal, Robinhood, Square, etc., which opens the door for the general public to hold bitcoin.

Considering the similarity between the two countries, I believe that the percentage of the US population holding bitcoins should be close to that of the UK, i.e. the current US population holding bitcoins should be around 30 million people, and we can look for confirmation from the prospectus of the upcoming Coinbase IPO. The U.K. and the U.S. are in the late stages of the adoption curve for crypto assets and are rapidly moving into the early majority stage.

In short, Bitcoin is moving towards the mainstream population and is being accepted by the mainstream perception. The deterioration of the external environment has also exacerbated this process.

What happened to ETH?

A) The fading of the ICO boom, a business model that has largely proven to be unreliable, with a few exceptions.

B) Slow progress on ETH 2.0, with roadmaps being changed again and again.

C) Multiple Layer 2 technologies that were expected to solve the core throughput problem have proven to lack Product Market Fit.

D) The monetary policy was reduced from 3 ETH per block to 2 ETH, but the inflation rate of 4.5% is still maintained with no clear expectation of a total cap.

E) The “ Ethereum killers” are falling one by one.

F) DeFi is growing big, and the product market fit is proven.

In terms of business development, ETH is a clear step forward. While ICO proved not to be a widely desirable business model, the later DeFi found a product market fit.

In the business of value storage, ETH has a slight effort (blockchain rewards were reduced from 3ETH to 2ETH), and there are many voices within the ETH community about this aggressive aspect, but the measures in this area are obviously insufficient, and there is no obvious effect from the results.

Regarding value storage, I have always believed that it is theoretically possible for smart contract platforms to achieve a total cap policy similar to that of BTC in their own monetary policy and compete with BTC in the future, but currently, it is clearly not the key direction for each smart contract platform, which I fully agree with.

Perception vs. Productivity

For the core bottleneck issue — throughput improvement, ETH obviously has not made any substantial progress. The current number of transactions processed by ETH is about 1.2 million per day, and assuming a user sends one transaction in 3 days on average, then Ethereum can only serve 3.6 million users. the ETH block has been full for a long time, and the long-term high miner fees have greatly inhibited the development of applications on top of the platform. For smart contract platforms that go the productivity route, it’s a huge failure.

In the past 29 months, the progress of ETH 2.0 has fallen far short of community expectations; and Layer 2 scaling solutions such as Plasma, sidechains, and lightning networks have not been accepted by the market to solve the throughput bottleneck.

Under such circumstances, Ethereum, as a productivity platform, can only exist as an asset settlement layer and is incapable of acting as a mass-based infrastructure on a global scale. If another platform completes a breakthrough in the future, the status of Ethereum as an asset settlement layer will also be shaken.

The author is not here to say that the ETH community is not working hard, in fact, the difficulty of smart contract platforms to significantly increase throughput without heavily sacrificing decentralized features is determined by the nature of things, and it does seem to be quite difficult at the moment, but not impossible, and I see some signs that there is hope for a substantial breakthrough in 2021, which will be discussed in the second half of this article.

Looking back, we can probably conclude that it’s “so obvious that it’s common sense”: smart contract platforms are far more difficult to improve productivity than BTC is to just lay back, wait, stay put, and hope for a little bit of luck as the outside world deteriorates.

Yes, looking back at history, the world always seems so simple.

The “bitcoin uselessness theory” has been the biggest obstacle to people agreeing on the value of BTC, and people always ask: “Why is bitcoin worth it?” Currently, the idea of Bitcoin as “digital gold” is becoming more and more popular. Gold as an asset is actually “useless”. Some people have calculated that the price of gold based on industrial utility, decoration and other practical value is about $50 per ounce, while the price of gold today is $1867 per ounce, so the remaining price of $1817 per ounce comes from people’s consensus based on the concept.

BTC is all about perception-based consensus assets; smart contract systems, on the other hand, are productivity platforms that inherently need to prove themselves.

From the second half of this article, I will replace the term “smart contract platform” with “productivity platform” because blockchain systems based on new architectures like Polkadot do not focus on smart contracts.

Conclusion

The first half of this article concentrates on reviewing the recent 29-month history of Bitcoin and the smart contract platform Ethereum, discussing how BTC as a consensus and perception-based asset, due to its own certainty and the great uncertainty of the proliferating external world, makes it as digital gold well suited to meet people’s needs, and people prove it by voting with their feet: BTC’s product market fit is exploding.

The author here further makes the inference that Bitcoin is likely to be the first Holy Grail with a market cap of $1 trillion. And Ethereum as a representative of productivity platforms, as well as other productivity platforms, all still needs to prove their strength.

The second half of this article will focus on the future, trying to boldly make some more predictions and analysis, including the breakthrough point of productivity platforms, stable coins, identity systems, etc.

Please stay tuned.

Article from LuBin

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China