The past three days may be the most eventful in web3 ever. Crypto assets have fallen by half or more, following their software counterparts. The attack on an algorithmic stablecoin’s peg harkens back to Druckenmiller breaking the Bank of England.
All the tumult in the crypto markets will catalyze change.
Here are my five mid-year predictions for the major evolutions that arise in response.
Consolidation. Five to ten L1s emerge as leaders driven by apps that attract users and net new GDP into their ecosystems. More dollars and users incite a positive feedback loop reinforcing the dominance of these L1s. In Defi, Lindy’s Law rules: institutional investors opt for protocols with the longest track records. Crypto-gaming succeeds in bringing 100m users to web3, starting with casual games which are easier to build, experiment, and iterate. AAA gaming titles arrive two to three years later because of their development lifecycles and studio risk aversion to invest tens of millions into a new platform.
Money pours into web3. Despite the volatility rollercoaster, regulation inspires confidence in web3. Institutional capital floods the market fueled by Dramamine and greed. Unable to general positive yield from bonds because of inflation, fixed income investors pivot to staking to outperform the market. VCs revel in the short term liquidity reminiscent of the late 1990s when startups went public in fewer than 4 years. Spectacular booms and busts continue.
Regulation. Basel IV will mandate that any stablecoin issuer become a bank and keep a minimum level of tier 1 and 2 capital. The first three Basel Accords set the minimum amount of capital a bank must hold. Each Basel Accord was authored in response to a crisis Basel I – the crash of 1989; Basel II – the dotcom crash, and Basel III – the GFC of 2008. The US Government enacts the Securities Act of 2023 to regulate crypto assets: their sale, their construction, FDIC admittance for stablecoins, and the establishment of a new regulatory body modeled on the the Securities Act of 1933.
Tokens ape stock rights; DAOs mimic boards of directors. Token holders demand dividend/revenue share rights in addition to voting. Investors start to value tokens on fundamentals. The 1/9/90 dynamic observed in DAOs consolidates voting power into a few delegates, which mirrors public company voting and board election. Tokens and DAOs remain distinct from stocks and boards because of the regulatory arbitrage that enables startups to go public in half the time of the classic route. But they serve effectively the same purpose. Utility tokens disappear to the end user replaced either by a stablecoin or an ecosystem reserve currency.
Token cap tables mirror equity cap tables. Web3 companies relax the fixed employee token allocation. DAOs issue periodic governance requests to increase the employee token pool to incentivize employees. The share of networks sold to investors asymptotes that of a web2 company at IPO, but it remains distributed across a broad institutional base and some retail investors.
Who knows if any of these will come true? But a year from now, I’ll grade these and see how close or far I was.