8 Market-Wide Factors that Affect Long-Term Cryptocurrency Adoption

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Bitcoin Accepted Here Cryptocurrency Adoption

Though media coverage has recently waned, cryptocurrency has been a hot topic over the last year with stories of sky-high returns and overnight millionaires. This in turn led to a great deal of investors (speculators) rushing into the market without any idea of what they were investing in, let alone an investment plan.

What many new investors didn’t understand is that blockchain isn’t about getting rich quick. It’s a long-term investment, and a risky one at that. Any number of things could happen, and it’s impossible to say with any certainty what blockchain networks or decentralized applications will be thriving five to ten years from now.

We can say one thing for certain, though: there must be a critical mass of adoption for the blockchain tech to reach its true potential. And we have no idea how big that market could be; it would be a first of its kind, taking us to a whole new stage of globalization.

But we’re not there yet. While we can’t know exactly where we are in the adoption cycle without the power of hindsight, there is evidence we are in the “Trough of Disillusionment” and “Chasm” according to Gartner’s Hype Cycle and Rogers & Moore’s Technology Adoption Lifecycle models.

Hype Cycle and Technology Adoption Lifecycle

The bull run of 2017 has shown how expectations for blockchain related projects have soared, as evidenced by an onslaught of media hype and irrational peak prices leading into early January 2018. Since then, media coverage has seemingly disappeared, prices have crashed, and little new interest has been sparked. Newer investors are exiting the market and declaring it all hype, leaving mostly visionaries, those that truly believe in the technology, either for profit motive or because they actually want to adopt and use the technology being developed.

It shouldn’t be surprising that we’re in the chasm. Public, decentralized blockchain networks are hyped to reach and affect the lives of 6+ billion people in the world. They are supposed to provide banking services for the underbanked and the option for everyone everywhere to become their own bank, to rid the world of unnecessary middlemen and trusted third-parties, to protect our privacy, to level the playing field and provide more opportunity for those at the bottom of the financial pyramid, etc.

Out of those 6+ billion people blockchain is supposed to reach, there are under 22 million unique Bitcoin addresses and just over 30 million unique Ethereum addresses. No doubt there is user crossover within those subsets and there are multiple users with more than one account. Compare this to the estimated 5 billion people who own and use cell phones.

Objectively, adoption is low, but it’s low for a reason. We are in the chasm because a high level of adoption simply can’t happen yet. The hype has died down and disillusionment has set in because blockchain networks can’t yet accomplish the things that make the tech so promising.

Here are a number of market-wide factors that will play into how soon we cross the chasm, the disillusionment ends, and true crypto adoption can begin.

We Are in Early Stages of Development

Most crypto projects are still in early stages of development, and we can only guess at what the finished product or what the competitive landscape will look like upon completion. Plus, the most promising projects, once launched, will initially only be used by early adopters until the tech has been proven and any kinks have been worked out. Even Bitcoin is still under development with the Lightning Network, which promises to increase the speed and throughput of transactions.

Furthermore, it will likely take even longer for blockchain-based platforms (such as Ethereum, NEO, EOS, etc) to reach their potential as these platforms rely upon third party development to create a thriving network ecosystem; they will need at least one if not several killer dApps in order to be successful, much like any other operating system.

A dApp is a decentralized application, an application that runs on a decentralized network.

Killer App is an application that drives consumers to use and adopt a system. Think Microsoft Office for PCs or Mario Brothers for game systems.

Crypto Must Be Easier to Use

Easy-to-use interfaces must be simple, straightforward, and secure. For high levels of adoption to occur, users must trust that their funds are safe and applications must provide an uncomplicated and intuitive user experience.

As a simple example, most people don’t want to send money to 0x2913633a8386fEFA21ab5c388057dC3df5e986A6. They want to send it to Bob, or Alice, or Mom. Nor do most users want to learn how to use complicated interfaces like Metamask or EtherDelta. We still have a ways to go before blockchain projects are actually used by the average consumer.

Crypto Must Scale (and then Continue to Scale)

Scalability is one of the most pressing concerns for projects that are already live. It’s difficult to convince consumers to switch to a new product; it’s even more difficult if the new product does less than what consumers were already using.

In one of his speeches, Bitcoin evangelist Andreas Antonopoulos discusses infrastructure inversion. The general idea is that disruptive technology can’t flourish until an infrastructure system has been built that allows it to flourish. Cars needed roads, electricity needed wiring, and the internet needed coaxial cables. It was only once this infrastructure was set in place that the technology could begin to reach its potential. Right now we’re developing blockchain infrastructure, and scalability is a huge part of it.

Take a look at some of the top blockchains with running networks:

Peak TransactionsTotal transaction volume peaked in January 2018 on major blockchain platforms, with Ethereum reaching 1.35 million transactions in a day. Chart from Bitinfocharts.com.

Now, take into consideration that Visa and Mastercard can conservatively process 20,000 transactions per second (and can reportedly scale to 50,000 TPS). At its peak on January 4, Ethereum processed 1.35 million transactions in a day, something Visa could do in about a minute; yet, during times of peak transaction volume, the Ethereum network can become backlogged and fees go up:

ETH Fee VarianceEthereum fees peaked as the network became backlogged, with average transaction fees eclipsing $4. Chart from Bitinfocharts.com.

Bitcoin can experience a similar situation with less transaction volume, and its network fees are even higher:

BTC Fees vs ETH FeesBitcoin & Ethereum transaction fees on the same chart. As you can see, Bitcoin’s average transaction fee peaked at over $50. Chart from Bitinfocharts.com.

Bitcoin and Ethereum developers have solutions in the pipeline, such as the Lightning Network, Plasma, and sharding, and time will tell if these solutions will make the networks capable of handling the massive transaction volume needed for mainstream use.

A study by CapGemini and BNP Paribas projects there will be 726 billion cashless transactions by 2020. Crypto will need to scale to make a dent in that market share.

Also, keep in mind that this example only deals with payments and banking, and blockchain infrastructure can lead to innovation and disruption in a number of other industries. Just as we’ve needed more roads to handle an increased number of cars and more bandwidth to handle an increased amount of data flow, scaling decentralized networks will be a continuous challenge.

The Future Requires Interoperability

There will not be just one blockchain in the future; there will be many, and they will need to connect with each other. This is another important piece of the blockchain infrastructure puzzle.

One of the biggest benefits blockchain technology brings is decentralization, and having one supreme chain would not only provide a level of centralization, it would (at least for the near future) be inefficient. This is partly due to scalability issues – as blockchain networks become unable to handle transaction volume, dApp development must migrate to networks with enough bandwidth for dApps to have a chance at success.

Moreover, just as we have a choice of operating systems on our computers because they provide different features and experiences, or how programming languages offer different advantages, blockchains will specialize: they may be public chains focused on privacy, speed, handling complex processes, storing data, or security; or they may be private chains tailored to fit an individual business’s needs. This will provide opportunities for dApp developers to create a robust ecosystem of applications, running on a variety of blockchains with unique purposes and strengths.

Yet all of these chains must be able to interact with each other, seamlessly exchanging assets and information in a decentralized manner. Without direct chain-to-chain interaction the ecosystem would not only be cumbersome, but it would in effect force us to once again trust third parties to relay messages from network to network – essentially eliminating one of the technology’s greatest benefits.

Protocols are being developed to connect our ever-growing web of blockchains, but a fully interoperable ecosystem will take time to build.

Blockchain Networks Must Be Sustainable

Sustainability is yet another issue factoring into our newly developing blockchain infrastructure system.

First and foremost, blockchain technology must be environmentally sustainable. Right now both Bitcoin and Ethereum, among others, use the Proof of Work method of reaching consensus, and Proof of Work consumes vast amounts energy. Though Ethereum is transitioning to a much more energy efficient system, Bitcoin and others will eventually need to reduce their environmental footprint in one way or another.

In addition, blockchain networks must be financially sustainable. Many have development funds, though how to use these funds is often left up to founders or a voting system outlined in the network’s governance protocol. Financial sustainability and the ability to continue development may play a large role in platform-specific adoption.

Crypto Needs Regulatory Clarity

All interested parties are waiting to see how governments around the world will react to cryptocurrency. Adoption can be boosted with a little help, or at least open-mindedness, from regulatory bodies; here are a few major opportunities:

1.     Tax Policy Must Adapt to Encourage Innovation

Right now the IRS treats all cryptocurrencies as property, greatly hindering their use. Under current rules any disposal of a cryptocurrency is a taxable event, and disposing of a cryptocurrency includes trading it for another cryptocurrency or using it to pay for goods and services, such as a cup of coffee or a haircut.

This policy discourages people from using cryptocurrency for two reasons: it complicates tax reporting, and it effectively raises the cost of goods and services if the cryptocurrency had appreciated in value. Imagine you wanted to buy a cup of coffee with Bitcoin for $3 and your Bitcoin had appreciated 20% since you first bought it – you’d be responsible not only for reporting the “sale” of your Bitcoin for that cup of coffee when you file taxes but also for paying taxes on the capital appreciation of that $3 worth of Bitcoin. Tax policy can deter people from using crypto and stymie the innovation that blockchain promises.

At the least, some type of compromise should be made to tax crypto according to how it is used. If it’s used as an investment vehicle, tax it like an investment vehicle. But if it’s used as a currency, to pay for goods or storage space or access to a censorship resistant internet, it needs to be taxed as such.

2.     Venture Capital Opportunities Should Be Available for All

Cryptocurrencies present an opportunity to open up venture capital investing to everyone in the world; yet ICOs (Initial Coin Offerings, much like Initial Public Offerings but with digital assets) are only available to accredited investors in the United States, meaning only the wealthiest citizens are able to participate. These rules are supposedly in place to protect citizens from losing money; however, it will only reinforce the status quo, allowing the income gap to remain and possibly widen. Those that don’t qualify as accredited investors are stuck gambling on the stock market or in Vegas.

Additionally, only allowing accredited investors limits the number and types of businesses that can obtain funding – those that an upper echelon of society decide to fund. Opening VC funding to all means a larger pool of investment capital and increased opportunity for innovation.

Crypto also allows for these VC investment opportunities to easily extend beyond crypto and digital projects and into the realm of funding brick and mortar businesses, with investors receiving digital shares sent directly to their digital wallets, which can then be traded freely.

This can all be done while in compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations, ensuring maximum opportunity for law-abiding citizens while restricting capital flows from criminals.

Anyone who wishes to participate in funding a new venture should have the freedom to do so. If I can legally put everything I own on red, I should be allowed to put a few hundred dollars into a project I’ve researched and would like to see come to fruition.

3.     Governments Must Realize Decentralized Exchanges Will Flourish

Stock markets bring people together to a central location to trade stocks and derivatives. While this trading no longer takes place only on the floor of the NYSE, it is still done through a centralized system because centralized systems fulfill the purpose of creating asset liquidity (making it easy to trade an asset) by bringing people together who want to buy and sell.

In the near future, these centralized systems won’t be needed; instead, we will have decentralized exchanges, protocols that will allow for direct peer-to-peer asset exchange. These protocols will be able to relay information to one another instantly, matching buyers and sellers all around the world, creating a giant liquidity pool for any asset in demand.

Decentralized exchanges will be highly efficient; there are already protocols that can automatically match orders across a range of assets. For example, if I have Bitcoin and want Ethereum, and you have Ethereum but want NEO, the exchange protocol can sift the order books and automatically turn my Bitcoin into NEO, completing our orders. All of this is done automatically, instantly, and cheaply.

A system of decentralized exchanges will be impossible to shut down (at least without shutting down the entire internet); governments need to recognize this and implement forward-thinking regulations that allow for this technology to thrive. Once they do, we will be able to digitize and trade traditional stocks, bonds, and virtually any other asset in a peer-to-peer manner.

Quick Summary on Government Regulation

I’m sure there are other ways regulators can affect the full adoption of cryptoassets, but it will obviously take time for regulatory bodies to decide how best to move forward. The G20 just announced that when they reconvene this summer they need to understand what data they need so they can understand how to evaluate what to do. Yes, you read that right. Until policy becomes clearer, the uncertainty of what’s to come will no doubt hamper cryptocurrency adoption.

Networks Need Reliable Links to the Real World

Though blockchain networks will easily connect the digital world, they will also need to access real-world information. As an example, take a simple escrow service that holds money in a smart contract on the blockchain until a consumer receives a purchased item. How will the network know that the item has been received, or shipped, or that it is in fact the correct item?

There are multiple projects working on this issue, creating what are known as oracle networks – links designed specifically to reliably and trustlessly connect the digital world to the physical world. It will no doubt take time to refine these systems and fully integrate the connection to a wide variety of real-world data.

Finally, Consumer Education Must Grow

There is a disconnect between what most people know about blockchain and decentralized networks and what the tech is designed to do. This is one of the reasons newer investors in the space are leaving – they were in it for the money, not the tech. Lack of consumer education has also fueled rampant cryptocurrency scams and fraudulent ICOs.

Consumer awareness will likely grow slowly due to the steep learning curve associated with blockchain technology; the inevitable hacks and scams and resultant negative publicity can create fear and further impede consumer education.

The majority of adopters will only come once dApps are proven, running at scale, easy to use and access, and useful to end-users. They will only come once they see something that is immediately useful to them, and they will learn how to use it.

Crossing the chasm and getting to this point isn’t going to happen overnight. There may be a bumpy road ahead, and there’s no certainty crypto will stick around – a lot has to happen if blockchain and decentralized networks are going to go mainstream. But if they do…

Adoption of Technology in the US