What’s Next For Crypto?

We can’t predict the future of crypto, and we certainly can’t predict the future price of cryptocurrencies. In such a volatile market, no one can. (Not that many haven’t tried.) That said, there are a few notable developments that are unfolding that could shape the future of Bitcoin and other blockchains. Here are some of the short-, near-, and long-term trends that seem likely to affect the crypto market.

The Bitcoin halving

Some features of the cryptocurrency market are baked into the protocols themselves, and therefore hardcoded into the future. One is called halving. This is a feature of Bitcoin’s protocol that constricts the supply of new Bitcoin about every four years. The halving is accomplished by reducing the block reward — the number of new bitcoins that a miner receives for processing transactions—by half.

The idea — which has been there from the start, encoded by Bitcoin’s pseudonymous creator, Satoshi Nakamoto, back in 2008 — is to make it harder for miners to exhaust the coin’s supply. There are a finite number of bitcoins that can ever be minted — 21 million — and the Bitcoin blockchain depends upon miners to harvest them. Nakamoto foresaw the possibility that Bitcoin would grow so big that these Bitcoins would become immensely valuable — as they indeed have done — and that the network needed to account for a rising price if it wanted to keep going.

There have been three halvings so far. The most recent took place in 2020. Historically, the halvings have been associated with a price rise; analysts think that this is because constricting the supply of new Bitcoin functions as a deflationary measure, since new Bitcoin becomes more difficult to acquire. Bitcoin rose to almost $20,000 in December 2017, a year after the 2016 halving, and to $67,500 about a year after the 2020 halving. Other analysts, including Castle Island’s Nic Carter, argue that the Bitcoin halving is baked into the price years in advance because of its predictability. In 2020, the Covid-19 pandemic shifted attention towards cryptocurrencies and risky stocks — and that had a greater impact on Bitcoin’s price than the halving, some say.

Few other coins have halvings built into them, but esoteric distribution schedules are a major feature of most crypto protocols. Until the Ethereum update is released, Ethereum burns coins instead of handing them to miners. Ripple Labs, the company associated with XRP, periodically sells coins on the open market. Other coins, like Dogecoin, are inflationary: the coin’s total supply can rise infinitely at a maximum rate of 5 billion per year.

Although these measures are baked directly into the protocol, that doesn’t mean that they are sacrosanct. Coin holders can vote to “hard fork” the network by copying the codebase to launch a rival blockchain. Bitcoin Cash and Litecoin are Bitcoin forks, for instance, each the result of alterations to Bitcoin’s code. Ethereum is actually a fork of itself; an earlier version of Ethereum lives on as Ethereum Classic.

The future of smart contract blockchains

Another major shift coming in crypto is the upcoming Ethereum upgrade. Years in the making, this updated system can best be understood as a fight for the future of smart contract platforms. (Smart contracts are bits of blockchain code that power decentralized applications, like non-custodial lending protocols and decentralized exchanges.)

Smart contracts, also called DeFi protocols, grew in value to more than $100 billion by October 2021 from $1 billion in February 2020. As of December 8, 2021, Ethereum is the largest smart contract blockchain. But Ethereum, the platform on which most DeFi protocols are based, is slow compared to competitors like Solana, Cardano, and Fantom. It lacks the interoperability of Cosmos and Polkadot. And it’s expensive to use: transactions can cost $200 at times of peak congestion. That’s compared to transactions on Avalanche, for instance, that cost under a dollar.

The new Ethereum promises to fix all of its problems, lowering costs and increasing speeds and — maybe most important — shifting the blockchain to an environmentally efficient consensus mechanism called proof-of-stake (more on that in a second). Scaling solutions, like Boba, Polygon, Arbitrum, and OMG Network promise to make Ethereum faster by performing some of the expensive computational work elsewhere. These are known as layer-2 solutions. The Lightning Network on the Bitcoin blockchain is another example of a Layer-2 solution.

The open question is whether the new Ethereum will be robust enough to prevent people from jumping ship to rival blockchains. In 2021, blockchains like Solana, Algorand, Fantom and Avalanche blew up in value, taking some of the business away from Ethereum. Several of these blockchains are compatible with the Ethereum Virtual Machine, which makes it easy for Ethereum developers to port code to other blockchains. For consumers, wallets like MetaMask make it easy to transfer assets between chains.

The rise of proof-of-stake blockchains

Proof-of-stake is a newer way of confirming transactions on a blockchain. It replaces the original way of doing things (the way that’s still popular on the Bitcoin blockchain), called proof-of-work, which confirms transactions by having computers race to solve complicated mathematical puzzles. On proof-of-stake, instead of earning the right to validate transactions by solving those puzzles, miners put up coins as collateral. The people with the most coins are the most likely to earn new ones. This is referred to as “staking” or “validating” rather than “mining.” Some people think that mining is more secure, since you’d have to compromise more than half of the mining computers in the network to cheat. In a proof-of-stake network, however, you’d just have to have the most money.

The difference to the environment is immense. The Ethereum Foundation claims that it will reduce the blockchain’s environmental impact by 99.5%. This is a big deal since sites like Digiconomist estimate that Ethereum’s energy consumption is comparable to that of the entire country of Kazakhstan, and its carbon footprint is comparable to that of Hong Kong. Despite those stats, Bitcoin developers have made no mention of transitioning to proof-of-stake.

Central Bank Digital Currencies (CBDCs)

Most central banks are researching forms of digital cash, known as central bank digital currencies, or CBDCs. Canada’s researching one, as is the U.S., the U.K., and the European Central Bank. The precise definition of a CBDC is difficult to pin down; they are obviously not entirely decentralised, since they’re minted by central banks. Most governments will admit inspiration from distributed ledger technologies like Bitcoin, even if their CBDCs don’t run on blockchains.

Generally, CBDCs are described either as digital equivalents to cash or interbank assets that only banks can use. A handful of countries are particularly advanced in this field: Hong Kong and Thailand are running in-depth trials; China is piloting a digital yuan; and some nation-states, including the Bahamas, Nigeria, and Cambodia, have launched them in full.

Cryptocurrency regulation

As cryptocurrencies continue to mature, government regulations on cryptocurrency are likely to evolve. Cryptocurrency law has already come a long way. China banned cryptocurrencies (for the umpteenth time) in 2021, crashing the crypto market and nixing its cryptocurrency mining industry. Canada introduced new regulations for cryptocurrency exchanges, and South Korea set new capital controls for cryptocurrencies. In 2020, the US clarified that cryptocurrency companies could form banks, and in 2021 the United States Securities Commission green-lit a handful of Bitcoin futures exchange-traded funds.

Regulation is expected to continue to tighten as governments grapple with the technology and work out how to integrate cryptocurrencies within their financial infrastructure. However, there are a couple of open questions about how this will happen. Some highlights:

The Chinese government really did a number on cryptocurrencies in 2021, labeling them responsible for “disrupting economic and financial order” and encouraging gambling, money laundering, and theft. The latest statements continue bans on the crypto industry that started in 2017. Some analysts think the bans are because the government is concerned that privately issued money, like stablecoins, or truly decentralised currencies like Bitcoin, undermine the Communist party’s ability to control its centrally planned economy, and will rival its new digital yuan. The ban on mining has already made America’s Bitcoin mining industry one of the strongest in the world, and made some countries, like Kazakhstan, attractive destinations for former Chinese miners.

In the United States, an open question is how the government will implement Biden’s landmark Infrastructure Bill. Passed in November 2021, the bill allows the United States to tax crypto companies to pay for key U.S. infrastructure projects. But a controversial point was how this crypto legislation would be implemented. The bill contains language that would require non-custodial applications, like wallets and DeFi protocols, to submit information to the IRS. These applications do not collect such information, potentially making life for decentralized finance very difficult within the U.S.

The U.S. Securities and Exchange Commission, America’s most powerful financial regulator, could also continue to crack down on decentralized finance protocols. Historically such protocols have sought to delegate control to their users through decentralized autonomous organizations, or DAOs—the consequence being that the SEC could not chase after DeFi protocols for issuing securities. However, the SEC’s new chair, Gary Gensler, has dismissed these efforts to decentralize as nothing more than theatre, meaning that a crackdown on DeFi protocols could be on the cards.

The SEC is also considering green-lighting “spot” Bitcoin ETFs. If it does so, it would open Bitcoin investments to public stock exchanges. The SEC has held off on doing so because, it claimed years ago, the industry is inherently manipulable. In 2021, it began to approve Bitcoin futures ETFs. They were hotly received and were some of the fastest-growing ETFs in history. Companies like Grayscale resubmitted applications for spot ETFs; if they are approved, they would make it easier for Wall Street to invest in Bitcoin.

Governments worldwide are likely to issue new regulation on stable coins like Tether and USDC. When Meta, then Facebook, announced plans to launch its own coin, regulators vowed to pass regulation that would curtail the ability for privately-run companies to undermine the sovereignty of central banks to control the money supply.

The metaverse

The metaverse is a bit of a blur right now. It refers to a virtual world where you could one day live or play. In its truest ambition, virtual and augmented reality would be indistinguishable from, or perhaps preferable to, reality itself.

This lofty ambition was described by social media site Facebook, which, alongside its rebrand to Meta, pitched a world where meetings would be held in virtual reality and basketball games could be played on real courts, with balls and players rendered in front of your eyes.

That kind of thing is decades off, but in the nearer future, cryptocurrencies are gravitating towards the metaverse. Projects like Decentraland and The Sandbox are blowing up, offering consumers slices of real estate for, in some cases, millions of dollars. Video game companies like Ubisoft are integrating NFTs into their games, and crypto-native NFT brands like CryptoPunks and the Bored Ape Yacht Club are becoming persistent online identities that holders find more compelling than their own personalities.

The metaverse may well be a marketing spiel, but it could also be a neat way to understand the future of crypto: increasingly online, pervasive assets that will herald a new, weird kind of financial outlook.