Insights and analysis for the professional investor Was this newsletter forwarded to you? Sign up here. |
|
|
Welcome to Crypto Long & Short! This week, Julian Love and Lou Mohn of Franklin Templeton Digital Assets argue that DeFi is coming to Bitcoin – and it could be huge. Then, Ned Menton of Runa Digital Assets discusses how one of crypto's biggest flaws – a lack of mainstream use – could be going away. As always, get the latest crypto news and data from coindeskmarkets.com. – Nick Baker, deputy editor-in-chief at CoinDesk
|
|
|
A More Than $1T Bitcoin DeFi Opportunity |
Since its inception in 2009, bitcoin (BTC) has steadily gained adoption and now has a market capitalization of over $1.3 trillion. It was designed to be a decentralized currency and real-time gross settlement system. The decentralized, protocol-based approach enables holders to shift trust from a centralized actor to a decentralized, code-enforced protocol. Despite bitcoin being the original cryptocurrency and corresponding blockchain, its functionality has been extremely limited up to this point relative to the smart contracts and decentralized finance (DeFi) functionality offered by Ethereum, Solana and other blockchains. However, this dynamic is set to change with the emergence of Bitcoin Layers, the meta-protocols, sidechains, layer 2's and other technologies currently being built on the Bitcoin blockchain. These layers will enable faster payments, as well as lending, enhanced functionality of fungible and non-fungible tokens, decentralized exchanges, GameFi, SocialFi and many other use cases. Holders of bitcoin will soon be able to increase the productivity of their asset via a protocol-based decentralized financial system. The primary differentiator between DeFi on Bitcoin and DeFi on other chains is the underlying asset (native token). Whereas Ethereum, Solana and next-gen blockchains compete on the merits of their respective technologies, DeFi on Bitcoin is purely focused on increasing the productivity of bitcoin, placing the Bitcoin DeFi ecosystem in a league of its own. |
The case for value creation via a Bitcoin-based decentralized financial system is driven by three assumptions: |
- preference for the Bitcoin blockchain as the base layer for other tokenized assets
- demand for greater productivity of bitcoin, the asset
- demand for a financial system that reflects the decentralized principles of Bitcoin
|
We already see strong demand signals for the Bitcoin blockchain as a base layer for other tokenized assets. The market for non-fungible tokens on Bitcoin, called Ordinals, grew from less than $100 million to over $1.5 billion in less than six months. However, the largest opportunity is still ahead. Most of the market value of Bitcoin's decentralized finance system will show up in the value of fungible tokens on Bitcoin. Fungible tokens will power greater productivity of bitcoin (the asset) via yield-bearing instruments and decentralized financial systems via protocols and layer 2s. Relative to Ethereum, Solana and other chains, the value of fungible tokens on Bitcoin is still minuscule, largely because we are in the early innings of programmable functionality on that blockchain. Bitcoin's leading non-fungible token protocol, Ordinals, wasn't released until January 2023. BRC20s and Runes, Bitcoin's leading fungible token protocols, were launched in March 2023 and April 2024, respectively. Even with these recent releases, additional functionality is required for a robust decentralized finance ecosystem to exist on Bitcoin. Additional functionality is being introduced to Bitcoin in two ways: |
- Bitcoin Improvement Proposals (BIPs): Upgrades to Bitcoin's core software are being pursued through BIPs, such as OP_CAT, which aims to enhance smart contract functionality and increase efficiency on Bitcoin.
- Technological Developments: Innovations like BitVM, pegs and bridges are being developed to provide users with enhanced programmability and efficiency without requiring an upgrade to Bitcoin's core software.
|
As previously mentioned, Bitcoin's decentralized finance ecosystem is still in the early stages of its life cycle. However, strong indicators of future growth can be seen via growing developer and DeFi activity in the space. In 2023, 40% of Bitcoin open-source developers were focused on Bitcoin L2s and scaling solutions. Then, in the first quarter of 2024, Bitcoin ecosystem total value locked (TVL) grew over six times from $492 million to over $2.9 billion. Given these early indicators, coupled with what we've seen transpire across other ecosystems, we believe over $1 trillion in value could be created in the Bitcoin DeFi ecosystem within the next five to 10 years. |
|
|
Join the CoinDesk Flash Waitlist
Your Portfolio Will Thank You CoinDesk Flash gives you the power of news that moves markets — be the first to get the latest crypto financial opportunities, trends, and technology insights. |
|
|
The Blockspace Singularity |
For years, crypto skeptics and believers alike have decried the lack of mainstream use cases for blockchain technology. Thousands of decentralized applications have been deployed, but mainstream use cases are scarce. That may be about to change. A singularity, a point of infinitely dense matter, is theorized to have caused the Big Bang when one such point exploded, distributing matter throughout the universe. I think we're at an analogous moment in the history of crypto. Over the last year, developers have delivered fast, cheap blockspace to builders. The "majors" have made huge strides, with Ethereum (ETH) deploying its Dencun upgrade in March, reducing transaction costs for users of layer-2 blockchains to less than $0.01. Solana (SOL) has (largely) fixed the downtime issues that plagued it until last year, leading to a massive surge in economic value on the protocol. New entrants have also been coming thick and fast. New layer-1 blockchains such as Sui, Sei, Aptos (APT) and others have launched in the past 18 months, promising unprecedented levels of throughput. This process is nowhere near complete, with yet another cohort of new and heralded blockchains expected to come to market with novel design elements throughout 2024 and beyond: | The experimentation stage begins Chris Dixon, in his new book "Read Write Own," predicts that "a key moment will be when the infrastructure becomes so good that application developers no longer need to think about infrastructure." Since crypto began, application developers have only had to think about infrastructure. Even if you had a novel idea for a crypto use case, infrastructure limitations likely kept you from executing it. Now that multiple blockchains with diverse designs can operate reliably at scale and low cost, developers can focus on what they can do, rather than what they can't. The figure below illustrates just how much tech there is to be experimented with: |
Recently, we've seen novel ideas for decentralized social media and social finance; DePIN networks that utilize high throughput blockchain solutions to enable real-world utilities; and AI-adjacent tools such as decentralized compute networks and AI agent platforms. Over time, novel applications will only get more popular and more performant as they work out what infrastructure best suits their needs. Perhaps this process will end with scaled applications running on modular solutions settling back to Ethereum, or maybe the monolithic vision will win, and Solana, Monad, Aptos or Sui will become the preferred blockchain of the masses. In the end, the market will decide what solutions work best once they can be tested at scale. Read the rest of the article on our website: The Blockspace Singularity – Runa Digital Assets. |
|
|
Here is some news worth knowing, from CoinDesk Deputy Editor-in-Chief Nick Baker: |
- NYSE: Much happened at CoinDesk's Consensus 2024 conference last week in Austin, Texas. A presidential candidate (Robert Kennedy Jr.) spoke, colorful people said and did colorful things and TradFi people were maybe more visible than in prior years. On that latter point, NYSE made some waves. First, the stock exchange operator announced it plans to offer bitcoin options, a pretty monumental expansion by a traditional financial player into crypto – following CME's 2017 decision to get into bitcoin futures. CME is one of the biggest crypto derivatives exchanges in the world now, showing TradFi can go toe-to-toe with crypto natives like Binance. Can NYSE do something similar with options? (Disclaimer: CoinDesk is providing the benchmark for these NYSE contracts.) Second, NYSE President Lynn Martin said on stage at Consensus that she'd consider offering spot bitcoin trading – if regulations around that were clearer. It's just one company, but it's a big one and it signals that Wall Street's embrace of crypto continues.
- MORE ETFS: Now that spot bitcoin ETFs are trading and ether ETFs aren't far behind, a popular game in crypto is guessing which cryptocurrency will be next to get packaged up into a tidy ETF wrapper in the U.S. stock market. On stage at Consensus, Ripple's Brad Garlinghouse identified three candidates: solana (SOL), XRP and cardano (ADA). All three are among the 10 largest cryptocurrencies by market capitalization, according to CoinDesk data, and they're also included in the CoinDesk 20 Index, which requires members to meet liquidity thresholds (aka they traded enough to accommodate the flood of investment you might see from an ETF). CME has long offered futures on bitcoin and Ethereum's ether (ETH), creating a robust derivatives market tied to the spot market; there's no SOL, XRP or ADA futures at CME – a potential impediment. But now that U.S. regulators have seemingly gotten more comfortable with ETFs that hold crypto, hopes are high for where this road will lead.
|
|
|
|
0 Comments