Milky Eggs

Six long-term crypto predictions

It is always fun to make predictions. But it is even more fun to make predictions while procrasting on editing a long draft of a different article!

I was originally going to also write short- and medium-term predictions. However, I don’t think I have any credible edge in those markets, so to speak. The future is notoriously unpredictable as it is, and if I have any particular advantage over others, it is most likely applicable over longer, rather than shorter, timeframes.

Put simply, my long-term crypto predictions are:

1. The effective capital gains tax rate for individuals will be driven downwards
2. Commercialized advances in zero-knowledge cryptography will dramatically improve everyday consumer privacy
3. Financial institutions will overlay centralized interfaces on top of decentralized infrastructure
4. The only durable, nontrivial applications of cryptocurrency in gaming will be in augmented reality and simple item markets
5. Ethereum will remain more relevant than many imagine
6. Implicit markets in everything will become explicitly accessible

Detailed explanations follow.

1. The effective capital gains tax rate for individuals will be driven downwards
   
   The rationale behind this prediction is simple. Suppose that (1) the breadth and quality of financial assets available on-chain expands, (2) these assets are accessible to any on-chain purchaser, and (3) it becomes possible to use cryptocurrencies to pay, anonymously, for physical goods. Supposition (1) is becoming increasingly true, with synthetic assets available via Synthetix and Mirror Protocol, supposition (2) remains to be seen depending on the extent of future regulatory action, and supposition (3) is gaining ground with systems such as Solana Pay. Although not certain, there is a reasonable probability that all three suppositions will be proven out in the long term.
   
   In such a scenario, a rational long-term investor may prefer to hold on-chain rather than off-chain versions of assets, assuming that the on-chain versions (whether synthetic or ‘real’) are sufficiently high quality, because capital gains from price appreciation may be completely shielded from taxation through usage of anonymizing services such as Tornado Cash. Currently, it is difficult to ‘cash out,’ i.e., actually spending on-chain money without identifying oneself poses various challenges. However, with sufficient adoption of cryptocurrency-based payments technology, this becomes less significant.
   
   Ultimately, as cryptocurrency technology matures, it is plausible that individuals will be incentivized to structure their investments so that they may realize capital gains on-chain in a fully anonymous, untraceable fashion, hence driving down their effective capital gains tax rate. I generally consider this to be positive. Note, for instance, that a number of highly developed countries such as Singapore impose 0% capital gains tax yet manage to more than adequately fund public services.
   
2. Commercialized advances in zero-knowledge cryptography will dramatically improve everyday consumer privacy
   
   Practical applications of zero-knowledge cryptography have driven theoretical advance, which in turn have been used to develop more advanced blockchains, and so on. It appears likely that we will see this positive feedback loop continue and even intensify over the coming years.
   
   Generally speaking, if sufficiently integrated into underlying systems, a reasonable segment of consumers should have a preference for protection of their privacy via zero-knowledge protocols. For example, one might imagine being able to make online payments without needing to provide identifying details or reveal the source of funds, being able to prove that one has login credentials without inputting them, riding a bus or train by proving that one has access to a valid pass without revealing the pass ID, etc. Although some consumers may prefer to forego their privacy in return for a financial incentive, a small market for privacy-supporting infrastructure will exist, much like it exists today.
   
   I expect, however, that it may take multiple decades before the maturation of theory, technology, and infrastructure is sufficient to enable widespread usage of zero-knowledge-based systems.
   
3. Financial institutions will overlay centralized interfaces on top of decentralized infrastructure
   
   The advantages of decentralizing some aspects of financial infrastructure are clear: at every level, from $10 international currency transfers to large institutional transactions, the functionality of finance today relies in great part on an immensely complex network of intermediaries (e.g. clearinghouses) with varying trust assumptions which are used to mitigate counterparty risks. Performing atomic options on an immutable blockchain is far simpler and cheaper. Therefore, it will not be surprising to see financial institutions slowly integrate decentralized blockchain technology into basic infrastructure.
   
   However, for the end user, it is implausible to me that large parts of the population will one day interact directly with blockchains as current adopters do now. Consumers like transaction reversibility; they like fraud protection; they appreciate simplicity of usage; they are, generally speaking, not technically adept; they cannot be trusted to manage their own private keys. For all these reasons, and more, development of centralized ‘interfaces’ on top of decentralized infrastructure seems inevitable. I suspect that for most people, institutional adoption of blockchain technology will be nearly invisible to them.
   
   Because of the permissionless nature of blockchain technology, operating directly on-chain will always be possible, which holds great value to me. However, realistically, it will not hold value to the vast majority (>80%) of people.
   
4. The only durable, nontrivial applications of cryptocurrency in gaming will be in augmented reality and simple item markets
   
   Put simply, there is no compelling use case for cryptocurrency (including NFTs, etc.) in the vast majority of video games. By and large, they simply do not benefit from the introduction of cryptoeconomic systems, and the ongoing attempt to shoehorn cryptocurrencies into video games feels much like a solution in search of a problem. Existing narratives are either incoherently vague (“imagine the potential!”) or glorified charity transfers from first-world speculators to third-world citizens (Axie Infinity). These are illusory and will not persist in the long run.
   
   In my opinion, where cryptocurrencies have the most to offer is at the interfaces which most closely connect video games to the physical world: first, augmented reality, and second, item markets. It is plausible that people would enjoy developing and interacting with complex cryptoeconomic systems in augmented or virtual reality, where there is a relatively thin interface between the game and the real world (such as in VRChat). Similarly, in peer-to-peer item markets, players are already aware that they are transacting with other players and therefore already drawing a conceptual separation between the market and the rest of the game.
   
   Notice that in both cases the user benefits from the emergent complexity of economic systems yet suffers little from loss of immersion. Particularly in the case of augmented reality, the overlying game is relatively ‘thin,’ hence mitigating the risk of adverse incentives, poor game structure, or unfixable mistakes being introduced via immutable blockchain technology. It is plausible that in these particular use cases, integration of cryptoeconomic systems could add immense amounts of value. Beyond these, however, I am skeptical.
   
   It is of course conceivable in principle that unforeseeable innovation in video game development might integrate cryptocurrencies, NFTs, etc. in ways that are truly value adds and not simply inferior to existing models. However, I have never seen a compelling use case articulated in precise language, and until I do, I remain pessimistic on this vector of adoption.
   
5. Ethereum will remain more relevant than many imagine
   
   Even in a multi-chain future, I believe that Ethereum will remain one of the most dominant blockchains (including value captured by Layer 2 solutions). With the introduction of zero-knowledge proof technology and danksharding, there is a credible path forward for scaling into millions of transactions per second.
   
   At an intuitive level, however, my main reason for optimism regarding Ethereum is an appreciation of the extremely high level of talent and competence displayed by its founder, Vitalik Buterin. It is difficult to overstate the strength of his intellect, which I would rate at being very close to the top tier — not as strong as Riemann, Galois, Scholze, etc., but perhaps comparable to Deligne, Milnor, or Gromov. Beyond pure intelligence, he is also a brilliant executor with demonstrated practical excellence. The continued existence of the Ethereum blockchain, which has evolved largely along the lines of his vision many years ago, is testament to his strength.
   
   It is a common mistake to underestimate the returns on marginal competence or to fail to appreciate that large discrepancies emerge between individuals even at the far right end of the distribution. I am appreciative of this fact, and hence I believe the potential of Ethereum is underappreciated by the market at large.
   
6. Implicit markets in everything will become explicitly accessible
   
   Whenever two people differ in opinion on the value of some asset (including derivatives, and not necessarily physical in nature), an opportunity exists for a mutually beneficial trade. In general, due to the heterogeneity of human wants and capabilities, we observe the emergence of “markets in everything,” as Tyler Cowen is fond of saying.
   
   However, many of these markets are “implicit,” in that although one can infer the potential of a market from isolated transactions between individual participants or from the existence of low-volume, obscure intermediaries, there is generally no primary marketplace that an arbitrary buyer or seller (within a given asset class) can easily access. For example, restaurant reservations are notoriously supply-limited, suggesting that restaurants underprice them (at $0); however, there is no generic secondary marketplace where one can go to buy or sell reservations, and the reservations market remains extraordinarily inefficient. (Note that attempts at forming reservations markets, such as ReservationHop, have generally been unsuccessful.)
   
   This is likely attributable to the high fixed costs (among other frictions) in establishing the necessary infrastructure for a niche market and coordinating participants together to render assets ‘compatible’ with that infrastructure. Generic, trustless frameworks that allow anyone to build on top of them, such as NFTs, solve this problem. They act as Schelling points upon which market participants naturally converge in the absence of any explicit coordinating authority. Moreover, as cryptoeconomic infrastructure matures, it will become increasingly simple for merchants to render assets compatible with this generic framework, and all market participants will benefit from intercompatibility with other aspects of the cryptoeconomic network.
   
   To be sure, many assets, particularly those which are intrinsically physical in nature or especially niche, will remain poorly compatible with generic cryptoeconomic infrastructure. However, it appears plausible to me that we will see an explosion of small, ‘boutique’ markets in the coming years, enabled by the generic and permissionless nature of cryptocurrency. Market participants may therefore expect to benefit from higher liquidity, more accurate pricing, and superior market clearance.

Broadly speaking, I do not expect any revolutionary changes, but instead life will improve modestly along a number of separate dimensions, as it often does with the introduction of innovative new technology. That being said, I look forward to being humbled by the unpredictability of reality!

All comments welcome, particularly ones which disagree with me.