In Part I of this piece we covered the evolution of key participants in crypto, going from hobbyists all the way to nation-states. Along with this progression, the main use-cases for crypto have varied significantly throughout the years. These can be captured in three main eras: crypto as in cryptocurrency (2009–2013), infrastructure and promises (2014–2018) and generalized crypto applications (2019 — present).
Throughout this progression we see the rise and fall of various projects taking on an ever-expanding set of applications for blockchain technology, making bigger strides at driving crypto into mainstream adoption.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” — Satoshi Nakamoto on the Bitcoin whitepaper
Satoshi Nakamoto first presented Bitcoin as a peer-to-peer electronic cash system in the midst of the financial crisis. The original whitepaper envisions a decentralized payment system powered by proof-of-work.
This idea of using blockchain for currencies was by and large the main use-case for crypto in its early days. The trend accelerated with the creation of the Silk Road marketplace, where people could then buy goods online anonymously.
This was before people learned that the blockchain’s transparency and immutability meant it would leave a trace of where this digital cash was being spent. However, this was not the main reason for the demise of the “crypto as in cryptocurrency” era.
Instead, it had to do with the core attributes of a currency: a medium of exchange, unit of account and a store of value.
With Bitcoin and Bitcoin forks being volatile in price, it served neither as a proper medium of exchange or unit of account. In order to be a medium of exchange, a currency should be widely accepted (typically with low transaction costs). And to be a unit of account, it should be relatively stable in value. Bitcoin fails at these two, but shows potential as a store of value.
For an asset to be considered a store of value, it must retain its worth or appreciate over long periods of time. Historically, this has been the case for Bitcoin despite its volatility. Moreover, widespread belief that something will hold its value creates reflexive properties resulting in it actually sustaining it.
This is why long-term investors carry the baton for the store of value use-case.
Hodlers, or addresses that have been holding for over a year, in aggregate increase their balance during bear markets. Moreover, once they begin accumulating, they historically have not diminished their balances significantly until after Bitcoin sets new highs.
This conviction by long-term investors sets the base for Bitcoin as a store of value, as consensus among the majority of holders (58% of addresses have been holding over a year) is presumably that it will sustain or gain in value or else they would not be growing their positions.
While other cryptocurrencies from this era are still around such as Litecoin or Dash, their use-case as a store of value has been limited to a small audience. Like Bitcoin, these assets are distributed as mining rewards and have similar accumulation patterns where long-term holders increase their balance progressively over time.
That being said, for the most part these have not achieved widespread adoption and have vastly underperformed Bitcoin. Plus, their inherent characteristics also make them fail as a medium of exchange or unit of account. Likely for these reasons, people started exploring ideas of expanding crypto beyond currency, leading to the next era of sectors and use-cases.
“Satoshi’s blockchain was the first credible decentralized solution. And now, attention is rapidly starting to shift toward the second part of Bitcoin’s technology, and how the blockchain concept can be used for more than just money.” — Vitalik Buterin on the Ethereum whitepaper
Though there were certain blockchains Namecoin attempting use-cases other than money (decentralized domain names in their case), at the time there was not a generalizable platform where multiple different applications could be deployed.
Vitalik first announced Ethereum in 2014, proposing it would be the infrastructure for decentralized applications to be built on top of. It then conducted the first ICO to fund the development of the platform, which would launch the following year.
Then people began tinkering with smart contract-powered applications, with The DAO being the first to gain traction. As a decentralized venture capital fund, The DAO raised 11.5 million ETH in 2016. While it ended up failing, it further validated the use for distributed crowdfunding that Ethereum had previously pioneered.
This led to the ICO mania, where thousands of teams raised capital from the crowd, promising to take over a myriad of industries.
Most ICOs turned out to be empty promises. However, they served to highlight the potential of the blockchain to coordinate capital and resources on a global scale.
The billions of dollars raised, mainly on Ethereum, led to the first signs of product-market-fit for smart contract platforms. This is further evidenced by users paying over $20 million in fees per week on Ethereum during the ICO mania, a figure that felt significant at the moment but is an almost negligible amount in the 2020s.
Similarly, the number of addresses holding Ether rapidly increased, growing from 400k in January 2017 to 8 million in January 2018. This pales in comparison to the 71 million addresses with ETH in 2022, albeit at a smaller growth rate.
Beyond Ethereum, many other smart contract platforms raised capital and began development during this era. While some like EOS failed to materialize, others like Solana and Terra have grown to support a thriving ecosystem of applications.
“Show me the incentive and I will show you the outcome” — Charlie Munger
This brings us to the current era in crypto, where thousands of applications are actually deployed and being used across dozens of blockchains. While these applications are still far from mainstream, they have managed to attract hundreds of billions of dollars, boosted by token incentives.
The first sector to gain traction was decentralized finance (DeFi). Although early DeFi applications deployed in 2017–18, they suffered from attempting to use the same models as their centralized counterparts. For instance, EtherDelta attempted to recreate an order book on-chain but failed to effectively match orders due to the low throughput of blockchains.
Purely peer-to-peer transactions were not optimal given these technical constraints. Hence, DeFi applications shifted to the peer-to-contract model, where smart contracts would aggregate several users’ funds and automate away complexities. This model gained steam with automated market makers (AMMs) such as Uniswap and lending protocols such as MakerDAO.
Despite finding a suitable model, DeFi still lacked liquidity. Here is when ingenuity and incentives came into play. Protocol teams, starting with Synthetix, realized that they could offer token rewards in order to attract greater liquidity, which would serve their systems to operate more safely and effectively, mimicking mining rewards in proof-of-work. This is how liquidity mining came about.
Then the lending protocol Compound, launched its liquidity mining by issuing COMP to depositors and borrowers in the platform. This accelerated the amount of deposits into the protocol and others quickly followed. Within months total value locked (TVL) grew from $1 billion to $10 billion in what is commonly referred to as DeFi Summer.
DeFi’s growth continued, reaching as high as $270 billion in value locked. A major factor behind this has been that token incentives began being provided not only by the applications, but also by their underlying platforms.
Polygon first successfully bootstrapped its DeFi ecosystem on the back of issuance of its MATIC token to users of select applications. This drove users and capital en masse to try their side-chain. Although the amount of value locked in Polygon declined as incentives faded, it remained at a significantly higher level above what it was prior to the program. It also planted the seed for the seed for a broader ecosystem of applications to develop now that there were users to cater to.
Just as we saw with Compound and other DeFi protocols, once Polygon showed what could be done, other smart contract platforms followed. This accelerated the adoption of a multi-chain universe, driving valuations of smart contract platforms along with it.
Asides from DeFi, perhaps an even greater evidence of adoption has been non-fungible tokens (NFTs). With NFTs crypto reached broader cultural relevance, attracting users not interested in money or financial services.
Following the landmark Beeple $69 million sale in February 2021, NFT volumes grew exponentially as famous artists, musicians and athletes began embracing NFTs.
In the chart above, it can be observed how even in a logarithmic axis, NFTs have been on a robust up-trend. This culminated with the search term “NFT” briefly surpassing “crypto” based on Google trends.
Although NFTs are often associated with the art and collectible use-cases, they are also increasingly used in games and other applications. In fact, Axie Infinity, the original play-to-earn game, has the highest historical sales out of any NFT collection, reaching over $4 billion. While the success of these games has thus far been limited compared to console or smartphone games, they point to another sector being disrupted by crypto.
Overall, throughout the past decade we have witnessed how use-cases for crypto have expanded far past Satoshi’s original vision of Bitcoin. This has led to three different eras, each with their own winners and losers. Each time, blockchain technology has managed to attract a wider set of bright minds to invest their time and money into the space, pushing adoption to greater heights. Ultimately, this suggests that crypto, despite its short-term ebb and flows, is on track for boundless opportunity in the disruption of a multitude of sectors.
