The impending doom of (many) protocols
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As I referred to in my post on crypto narratives yesterday, I think protocols as a whole are overvalued relative to the cryptoasset market and we can expect to see this decline in the coming years.
By my count, at least 50 of the top 100 (and 41 of the top 50) are protocols. Most of these protocols have no real activity on them. Not no activity in the same way that most of the DApps on Ethereum have few users, no activity period.
Just have a look at a few of the protocols recent transactions, bearing in mind that Elastos and Stratis both count one transaction per block as the block reward:
You could say I’m being unfair for focusing on this lack of activity, as just yesterday I was saying we need more time to allow for users to come.
However, DApps are very different to protocols. DApps require users to come. Users do not care about the protocol used. It is only the developers and project teams who care about which protocol they use, and they are far more informed and understand the pros and cons of the various protocols far more than the average user will.
Ethereum is the clear frontrunner right now (obviously Bitcoin is not included in this discussion). It has the developer support and the vast majority of DApps intend to run on it. Therefore, to compete with Ethereum you need either:
- To be able to scale without compromising decentralisation or;
- Offer something different
There are no other protocols currently existing which have proved they can scale without compromising on decentralisation, although there are gradients of how they fail to tackle it.
The first set are the protocols which have the exact same issues as Ethereum but lack any real competitive advantage. As far as I’m concerned those are dead already and I wouldn’t touch them with a bargepole. These include the older protocols such as Neo, Stratis, Waves, Qtum, NEM etc. And yes, I know Neo has some projects on it, and yes it’s Chinese (I remain unconvinced it has the ‘blessing’ of the Chinese government like many adherents claim), but that isn’t enough to make up for its technical shortcomings.
I then think you have another set which promise improvements in scaling, even if they may use consensus algorithms that tend towards centralisation such as EOS, IOTA (until there is no Coordinator I don’t believe the network can survive without it, sorry) and TRON. However, I don’t think any offer sufficient improvement without a cost.
Then there are a third set which at least offer some sort of specialisation or focus. These would include:
- Privacy focused: You could do this same exercise ranking the privacy coins to reduce them to one or two
- Currency: If we assume Bitcoin won’t be used as a currency, then there is still room for this. Not convinced by anything currently out.
- Specialisation/competitive advantage: Elastos and their VM approach is at least different and could have wide application, Decred which has built up a more solid community (just look at the rate of staking) or EOS (I may have written it off above but firstly not everyone cares about centralisation creep and secondly they have a $4bn fund to get people to build on their network. That’s a significant advantage.) Ripple would be another with a different focus to the plethora of smart contract platforms.
I think therefore if we’re being optimistic you could probably count about 10 protocols which have a shot of surviving out of the 50 in the top 100. I would personally say probably three have any real chance of ever seeing adoption, and two of those haven’t launched yet.
So, what happens to the rest? The only point to owning protocol tokens is to benefit from the underlying activity. When no activity comes, what happens? Prices are bound to fall.
Even if value does congregate at the protocol layer, you’ve got to hold the right protocol to benefit. Splitting across 50 protocols is an awful strategy if most of them decline in value relative to the market. Even interoperability, the supposed saving grace of smaller chains everywhere, will fail to act as saviour — why would anyone waste their time building on top of otherwise dead chains when they could build on another, even if they are interoperable? And why not just invest at the interoperability layer?
As such I’d be wary of holding the vast majorities of protocols in the coming years. You could argue I’ve been arrogantly dismissive of a lot of projects (and I’ve written this in about 10 minutes so it’s not going to be one of my more structured arguments) but I believe the core premise holds.
There’s simply too many protocols, and a huge number of competing platforms doesn’t last once a space matures. It always consolidates to a small number. That we will end up with 50 protocols all valued extremely highly just doesn’t pass the common-sense test.
Disclaimer: Of those mentioned in this article I hold BTC and ELA.