Under-the-radar product trends: 2020 recap and 2021 predictions
At the end of last year I wrote about three under-the-radar product trends for 2020. Let’s recap to see how well I did before making my three predictions for 2021.
1. Smart contract insurance
Verdict: Correct.
Active cover amount on Nexus Mutual grew from $1.1M insured to $56.4M insured in 2020, a 50x increase in one year!
2020 also saw over $93 million lost in a slew of hacks — bZx, dForce, Opyn, Harvest Finance, Value DeFi, Origin Protocol, Akropolis, Pickle Finance, and others — while Nexus successfully paid out its first claims in the bZx hack. With $14 billion locked in DeFi smart contracts right now, DeFi projects represent a huge bounty for hackers and more risk-averse individuals and funds want to get covered on their deposits.
Another big takeaway from these hacks is that smart contract audits are less meaningful than they used to be. Auditors are fully booked and likewise miss bugs while under deadline pressure, notwithstanding not auditing other types of vulnerabilities such as flash loan attacks. Going forward, I expect to see projects allocate some of their funds that were going to pay for expensive audits towards incentivizing insurance pools for users to purchase cover on their project.
2. Bonding curves
Verdict: Correct.
AMM-based DEXs emerged as a clear winner over order book DEXs and Dutch auction DEXs. Uniswap, in particular, accounts for over half of the DEX market share. As AMM-based DEXs are eating the lunch of order book CEXs, this has triggered the ire of incumbents who feel threatened by bonding curves.
We also saw the rise of custom AMM bonding curves tailored towards solving specific trading use cases. Curve, which specializes in stablecoin to stablecoin and BTC on Ethereum swaps, uses a hybrid constant-sum/constant-product bonding curve to minimize slippage for trading pairs that aren’t expected to deviate significantly in price. Notional, which offers fixed-rate fixed-maturity loans, uses a logit curve to minimize interest rate slippage from trading zero coupon bonds especially as they approach maturity.
3. Wallet user-experience
Verdict: Wrong.
More specifically, I predicted that contract-based accounts are a major UX improvement over externally owned accounts and we’ll see an explosion of smart contract wallets in 2020. Back then though, gas prices were only a couple of gwei. Then came DeFi summer and gas prices skyrocketed to over 100 gwei. This made smart contract wallet deployments cost up to $20 per new user, and Argent was spending $584k a month at one point subsidizing its users’ transaction fees.
Given that gas prices aren’t coming down anytime soon, Metamask’s dominance is here to stay. DeFi usage will continue to be driven by power user whales who are comfortable with crypto-native wallets behaviors.
With that, here are my three under-the-radar product trends for 2021.
1. Crypto art
DeFi maximalists currently dismiss NFTs as a toy, reminiscent of how BTC maximalists dismissed dApps back in 2018. But underneath the surface, there’s an extremely passionate early community of artists and collectors — I know this first hand since my SuperRare Twitter bot gets close to a hundred notifications a day. Furthermore, the crypto art industry has been quietly exploding with over 50% MoM growth in volume … until December happened.
Beeple, a 3D artist with over 1.7 million Instagram followers, recently discovered NFTs and tokenized several of his Everydays artworks. One piece set the record for the most expensive crypto artwork at $777,777.77, and Beeple currently sits as the top crypto artist with almost $6.5M in total artwork value.
Other posts have covered the crypto art opportunity in depth, but I’ll briefly summarize why I think crypto art will be big. First, the blockchain makes it easy to verify the original artwork’s authenticity, while traditional artworks such as Picasso paintings are hard to forge but also hard to verify. Second, NFTs unlock a new business model for digital artists as they can now sell individual artworks and not rely solely on commissions from business clients. Third, crypto art is well-positioned to capture the boomer to millennial shift in tastes in the art world. Lastly, crypto art is a potential avenue for mainstream adoption of blockchains and cryptocurrencies.
Currently three artists have over $1M in total artwork value and 43 artists have over $100k; I expect to see way more than that end of 2021.
2. Prediction markets
One big story of 2020 not covered by mainstream media is that the pollsters had Biden at 85–90% chance of winning the election, while prediction markets placed the odds at around 60–65%. In hindsight the election was a lot closer than expected and the pollsters were completely wrong. Even worse, polling is a multi-billion dollar industry and hundreds of millions of dollars of campaign money was literally wasted due to inaccurate polling data.
We’ve been bullish on prediction markets for a very long time as a source of information in a society distrustful of mainstream media. For a while though the timing seemed too early with little volume across markets; now prediction markets have hit an inflection point and volume is reaching tens of millions of dollars. Not only do I expect to see more markets reach tens or hundreds of millions in volume in the coming year, but I also expect to see the media use prediction markets more often as a source of information to report on events such as the Eth2 Phase 0 launch.
3. DeFi derivatives
From 2018 to 2020, we saw the foundational pieces of DeFi laid down. This includes borrowing/lending protocols (e.g. Compound, Aave), trading venues (e.g. Uniswap, Curve, Balancer), and asset issuance (e.g. USDC, DAI, WBTC). While these foundational layers continue to grow, significant liquidity on these layers enables a whole new layer of derivative financial instruments to be built. Some examples include structured products, index ETFs, options, futures, swaps, and more.
In traditional finance, the derivatives market is many times larger than the spot market. Blackrock has a $100B market cap and the total market value of structured products can be estimated to be 5–10x bigger ($500B-$1T). If there’s any translation to DeFi, this means that there’s a significant opportunity in derivatives and projects like DeFi Pulse Index, Hegic, and Barnbridge are just the tip of the iceberg of what’s to come.
