I am fixated on the evolution of cryptocurrency markets. The resemblance of public networks to biological life is too clear — both change before you have time to understand them and both mutate to dominate their environment. I have written about this topic before. Here are two examples: (CryptoEvolution Part 1, Competition).
I believe one-off BTC forks are unlikely to outcompete BTC, the smart contract war is heating up with Ethereum in the lead, evolutionary abilities are key to winning the smart contract war and precedes the grander goal of becoming a platform for the global financial ecosystem. Also, follow the banks and developers and that evolution requires funding, so be creative.
Before we move on, I just wanted to remind you that I could be completely wrong. Also if you believe layer-1 blockchains never have to evolve, then this post won’t be your cup of tea.
When you’re researching crypto’s on a cellular level, sometimes it’s worth zooming out. Let’s switch from a microscope to a telescope.
One Off Bitcoin Forks Are Non-Competitive Stores-of-Value
Early Bitcoin (BTC) forks rose to prominence through one-off changes, or “tweaks” that were a one-time edit to one or multiple aspects of BTC. Litecoin was a fork of the BTC Core client that cut BTC’s block times by 75% to 2.5 minutes and changed its scripting algorithm (Scrypt from SHA-256). The Bitcoin Cash fork notably increased the block size from 1MB to 8MB to increase on-chain scaling at the potential cost of decentralization.
There are countless Bitcoin forks, most of which are irrelevant. From a security perspective, forks are weaker; It costs around $1,100 to 51% attack BitcoinGold and $67 to attack BitcoinZ. From a development perspective Bitcoin’s spin-offs are also weaker; Litecoin has limited development activity.
My issue with one-off forks with a SoV asset like BTC is that once a change is made then you have to circle back and compete with BTC again as an immutable, hard to change SoV asset on face value and against BTC’s network effects overall. Litecoin and Bitcoin Cash have one-off changes and now they are circling back to compete with BTC.
Think about it this way: Facebook is the dominant social networking site. Someone comes along and forks Facebook to change the theme color, edit the length of posts and increase the number of friends you can have. Once these one-off changes are complete, Facebook V.2 has to go back and compete with Facebook V.1 as the dominant social network site. You are back to square one minus all of the network effects.
Further, even if Facebook V.2 miraculously wins, what happens the next time a change has to be made? The new version has to beat Facebook on face value and beat its network effects. You’re back at square one yet again.
I used this example because it is easy to understand, yet flawed. Bitcoin is not a website, it is a form of currency fostered by security which is tied to the value of Bitcoin. Currency is universal and Facebook is a developed world novelty.
Net, any BTC fork that has one-off changes will have an insanely difficult time competing with BTC. Given the post changes, it has to circle back, compete and ultimately beat BTC at its own game, most would agree this is an insurmountable goal. At Delphi Digital, we are confident in Bitcoin’s long-term success as a digital, censorship-resistant, disinflationary and global store-of-value.
Evolution Applies to Smart Contract Platforms
I am of the opinion that BTC can be a global, digital and immutable store-of-value. Granted, I think it would be narrow to assume that we will live in a future with only one cryptocurrency. We have multitudes of tradeoffs today and these will only grow as the world transitions from analog to digital.
As the target markets for cryptocurrencies grow in size, the tradeoffs between them will grow. As such, the TAM for different cryptos should grow in size opening the door for more than one crypto currency. This is true unless it ends up being the case that every layer-1 asset has to compete to be a SoV.
While smart contract platforms are limited today (throughput, use cases, adoption), I don’t believe it’s worth writing off the technology as it will likely constantly improve and evolve. For example Ethereum can only handle 7–15 transactions per second today, not nearly enough to support viral smart contract or use cases, but major potential improvements under Serenity can augment this if the upgrade is successful.
The same applies to BTC’s Lightning Network, capacity is only $6M today, but could theoretically be orders of magnitude higher as the underlying technology improves.
Within the smart contract space, I believe evolution needs to be monitored microscopically. The platform that upgrades to enable the most incremental functionality will likely win, and given we are in a time of explosive experimentation, this aspect to be tracked closely.
Ethereum has clear dominance in the space. The breadth, depth and amount of teams working on the platform puts it ahead of every other smart contract platform. It is not even close right now. Be honest with yourself, it’s your money at stake.
This being said, it is Ethereum’s game to lose. Tezos has been through the legal ringer, survived and is now seeing a strong community with its live, proof-of-stake network with over 80% of its token holders validating transactions. Albeit, I am unsure the concentration of Tezos’ token holders which could make up a large portion of this staking percentage. Initially, Tezos’ ICO attracted ~30k participants (possibly 5x Ethereum’s ICO) but I am unable to find a token distribution for Tezos at this time.
Tezos’ Athens upgrade is progressing smoothly versus Ethereum’s Constantinople upgrade which was shaky to say the least. Granted, Tezos’ upgrade is simple and the community is much smaller. Ethereum’s upgrade had many more stakeholder groups and opinions about a more developed network. Although, it would be misguided as a stakeholder not to question whether there may be better ways to evolve these systems.
Polkadot is a smart contract platform and is also an interoperability platform. Basically, it is the latter, with a goal is to be dominant in the prior, in my opinion. Developers only have so much time in the day.
There is nothing wrong with this theory yet stakeholders on both sides need to interpret the competitiveness of this landscape. Polkadot is working to attract projects to build on its platform which is a bit different from only marketing to connect projects on different platforms.
I am a researcher who fully embraces competition. Ethereum 2.0, Polkadot, Algorand, Dfinity, Tezos, Cosmos, et. al., are all in a race. Unknown synergies will likely surface and there is no reason Bitcoin and Cosmos can’t compete against Ethereum and others in the future.
The best thing you can do is to watch the developers and focus on timelines. Polkadot hasn’t even launched yet so when it does it will be competing with the Ethereum, Tezos and all of tomorrow, not today.
While many watched Ameen Soleimani (CEO SpankChain) fight with Lane Retting (Ethereum Core Developer) over the latter’s opinions over Ethereum’s governance with popcorn and laughs, I was watching to see if Lane would leave to work on a different Smart Contract platform.
Follow the developers, they are the crypto doctors in charge of mutating these platforms to evolve.
Follow The Banks
While smart contracts are competing today, the ultimate goal is for one of these protocols to become the preeminent global financial platform with an SoV at the base layer. It all boils down to security given developers won’t build on a decentralized platform if they don’t trust the platform’s reliability over the long term. I believe smart contract competition today precedes this grander goal.
Thus, it’s also worth following the banks and entrepreneurs and seeing which platforms they are building on, and why. We need banks and major firms to create consumer-facing financial applications built on these platforms, whether it’s a mix of DeFi or centralized applications built on top of crypto, to serve the needs of billions of people.
It’s not 2009 anymore. We can’t resist the synergies Wall St. can offer crypto.
J.P. Morgan is building its stablecoin on Ethereum tech and Société Générale issued a $100M bond on the Ethereum blockchain. This isn’t meant to pump Ethereum’s wheels, it’s meant to demonstrate to follow the banks too, as they have trillions in assets and more customer relationships than any crypto platform can dream of, so we should be open to traditional banks’ involvement in crypto as they can bootstrap use cases and adoption overnight. That being said, Facebook has more users than any bank, and their involvement could bootstrap crypto literally overnight.
One “war” scenario could be BTC with Bitcoin Banks (normal institutions) building uses cases requiring BTC as a SoV versus the “crypto centric” world where DApps/Use Cases like MakerDAO use ETH as a SoV. As such follow the banks and the developers.
Evolution Takes Many Forms
Decred and Tezos have attracted my attention because the two closely resemble evolutionary systems. Their ease of implementing changes (token holders just vote through a wallet) is simple and easy.
Decred recently voted to enable lightning functionality (DCP-0004) and Tezos’ Athens upgrade is moving forward. Many haven’t heard about either since there aren’t any fireworks. It’s funny how drama attracts a crowd and maybe that’s Ethereum’s playbook right now as it’s both a side effect of informal governance and it’s human nature to be drawn to the fight, and then get involved in some capacity.
On-chain governance may be more organized but the decentralization trade-off is the risky elephant in the room.
Ease of implementation is only half the evolutionary equation. A platform needs thousands to millions of people working on the specific research and upgrades to improve the platform itself or what is built on top of it. Call it the research pool. Tezos and Decred have much smaller research pools than Ethereum today.
The caveat is that we are early in the experimentation of on-chain governance methods. The ability for quick and easy upgrades can put a platform at risk given these changes could negatively impact the platform without a proper understanding of the downstream effects.
One idea is for a competing platform to copy and paste an upgrade another chain has implemented, but then you’re still playing catch up, enter Facebook V.2. One could argue Decred for example is copy and pasting Bitcoin, but to avoid becoming Facebook V.2. in this scenario, Decred has to prove that its long term treasury model can fund upgrades to differentiate it from other cryptocurrencies. One way may be Decred’s hybrid PoW/PoS consensus mechanism which could help the platform compete on what we keep going back to, security. Tezos has to prove it can do more than follow in Ethereum’s footsteps in focusing on financial use cases.
To avoid confusion, I don’t believe that Tezos and Decred are in competition, but are instead examples of new evolutionary forms of Ethereum and Bitcoin, respectively.
One example is Binance’s lead developing BNB as a discount token for use on its exchange. This concept was copied by Huobi, Bibox and KuCoin, which didn’t matter as Binance is still the number one exchange by volume. The other three exchanges rank 3rd, 12th and 18th, respectively. You can’t copy and paste your way to the front, it’s fake evolution.
Keeping up with a fast-moving research community is hard. Just try to keep up with Ethereum’s news, and the projects building on it — it’s impossible. That raw, messy, insane newsflow is the culmination of a global base of developers working on the platform.
Enjoy the mess, its proactive. It’s similar to the medical world where we are going to solve major diseases by having large teams of high quality doctors researching them. Even if a smart contract platform’s researchers can’t solve one problem, the massive capital deployments in the space will lead to other creations and solutions during this process.
Eli Lilly spent large sums of money creating the drug Evista, which was used to treat osteoporosis and then found to be viable in reducing breast cancer. Gemzar is a drug researched for its antiviral properties and now treats cancer.
Evolution Requires Money
Bacterial evolution requires energy while for smart contract protocols the fuel is money. It’s funny — the thing we need to use is the thing we’re trying to get away from (Fiat) to build the future we want (crypto).
Most argue BTC doesn’t require funding, this is true to an extent. Two prominent companies building the future of BTC require funding: Blockstream and Lightning Labs. This holds true even for MIT’s Digital Currency Initiative which helps fund protocol-level research; while you can donate to support their research (altruistic) the primary source of funding comes from 80 corporate members (businesses).
Altruistic developers can only go so far. Rent is due on the 1st of the month.
There is nothing wrong with funding the future of these protocols with investor money. But it’s worth keeping in mind that these for-profit business will eventually have productize their inventions to earn a return. It is early but this could add friction to new inventions.
Newer platforms dabbling with on-chain treasuries are interesting. Ten percent of every block reward in Decred go into a treasury, and token holders can easily propose how to use these funds and vote on them. If Decred is successful, this is a long-term, sustained funding model that doesn’t require productization. A developer can get paid for an upgrade without having to productize the upgrade and earn revenue for a company. That’s powerful.
One idea could be for the Ethereum Foundation to stake its funds in proof-of-stake and use those the rewards as a sustainable, long term funding source.
Other ideas are popping up. MolochDAO is a community-funded pool to fund projects to further Ethereum. Regardless, I’m indifferent to how a protocol obtains funding, whether through for-profit companies or on-chain. BTC’s Layer-2 is being funded with investor money, not solely altruistic developers.
The point is that evolution requires funding, and if a protocol doesn’t have it, it’s not going to mutate to dominate its environment. Bitcoin has evolved. BTC Improvement Protocols (III) were moved forward to change the protocol to enable new technology (BIP 112 and others for Lightning/Payment Channels). Ethereum also has its EIP list which is getting longer by the upgrade cycle.
Eventually we will reach a point where a protocol doesn’t need to evolve anymore (TCP/IP) but I currently believe we are too early in the life cycle of these protocols to freeze and stabilize (demonstrated by the addition of new BIPs and EIPs for BTC and Ethereum).
Interoperability and Composability Make it Even Harder for New Platforms to Out-Evolve Existing Ones
Interoperability (ability to leverage other blockchains with different tradeoffs for a use case) and composability (leverage multiple pieces of infrastructure on one blockchain) demonstrate that we need other, new blockchains even less.
The examples are obvious. If someone is building a use case that needs strong security guarantees on state, they will store the data on BTC. No need for another BTC, especially as more and more people do this over time further building a network effects moat for this use case.
If one is building a decentralized finance application, note that Ethereum already has numerous DeFi building blocks in place (stablecoin, decentralized exchanges, prediction markets) that any developer can leverage, so there’s no need to recreate these wheels on other chains and then work on your original project.
Why recreate needles and microscopes when you can just get started and build your project on an existing chain? Call it composability lock in, it’s hard to break.
While other chains look to replicate these base building blocks, the leading chain is on another level working on applications that bundle these blocks (i.e., Tezos may release a stablecoin, but Ethereum’s devs are already leveraging its existing stablecoin, Dai, into consumer facing applications).
Don’t discount this incremental time advantage. If a killer future use case requires a few fundamental building blocks that already exist on another chain, it doesn’t matter how close the runner up was if the killer app can come to market faster using the building blocks that already exist on a dominant chain.
VHS vs Betamax: Network Effects Matter
The Sony Betamax offered higher picture quality over VHS and debuted one year prior to VHS, but VHS eventually won since it was cheaper for consumers, had a longer initial playback time (two hours vs. one hour) and a larger distribution and licensing network. VHS introduced two hour playback times in 1976, Betamax enabled it a year later in 1977, by then it was too late, consumers and film-makers preferred the longer format capability. Time matters.
VHS was focused on broad consumer appeal and an easier, more open licensing model (think mass developer appeal in crypto to a smart contract platform), which culminated in a massive distribution edge over Betamax.
Sony eventually caught up in matching every VHS feature (automatic timers, pre-programming, etc) but by then it was too late to beat VHS’ dominant market position. VHS became the industry standard.
Net, you don’t have to be the first to enter a market to win and network effects truly matter when the tech only has slight advantages.
It’s my opinion that one-off BTC forks are irrelevant since they are making one-time changes and have to circle back and compete with BTC on network effects and its ideals and that’s likely impossible.
For smart contract platforms meant to enable functionality beyond money, evolution should be tracked with a microscope. Hire a team of people, give all of them microscopes too.
These platforms need to demonstrate not only an efficient way to upgrade but a global research pool that has the breadth and depth to innovate, first. You can’t bake a cake without the purchased ingredients first.
As a finance person by nature, while the competition’s chances for success for new chains are small, they could result in outsized returns if they win. Tezos is somewhat under-the-radar and if it attracts some percentage of Ethereum’s developers or global mindshare, the return could be large. Think of it on an adjusted basis where the percent is low but the payoff could be high.
It’s my opinion to leave one-off BTC forks at the door and on smart contract platforms to follow the developers (protocol and those building on-top) who have funding, and the banks, as closely as you can. All cryptos and smart contract platforms are competing on security, but the caveat is that it must be a platform which developers can actually build on.
The virus is spreading, but it’s also mutating. The winner(s) will dominate not only the smart contract space but the grander vision as the pre-eminent global financial system.
Recognition: A special thank you to Ryan Sean Adams for his time, and insightful conversations which helped me to form my views on these topics, and to Spencer Noon, Gregory Rocco, Kevin Kelly, Sam Corso and Anil Lulla for their suggestions, corrections and insights on this report.
Delphi Digital: If you’re a fund, analyst or firm looking for the most relentless research team that analyzes these trends, visit Delphi Digital.
Disclosures: This post is strictly informational and educational and is not a solicitation to buy or sell any securities or tokens. Always do your own research and do not make financial decisions based upon this post. The author holds tokens in BTC, ETH, DCR, XTZ, MKR and LOOM at the time of this publication.