Crypto in 2020 advanced leaps and bounds, both in monetary value and regulatory & social acceptance. While there is plenty to write about, a few developments in the sector stand out. The TL;DR is that the European Commission introduced MiCA; Proof of Stake is becoming the new normal, and DeFi is now a word.
1. MiCA Accelerates Regulatory Clarity in EU
The EU in September formally agreed to evaluate a proposal titled the Market In Crypto-Assets Regulation, which, if passed, would definitively regulate crypto tokens in EU member countries. The MiCA regulations, which are purposely technology-, asset class-, and jurisdiction-neutral, would position Europe as the largest and most valuable uniform regulatory territory.
The release of the proposed MiCA regulations provides EU member countries with a much greater understanding of how to structure their cryptocurrency regulatory frameworks and enables more accurate prediction of forthcoming regulatory requirements.
Even though the MiCA regulations, if passed, would not take effect for several years, market participants are already reacting. The proposed regulations were even purposely “leaked” in advance of their formal introduction to the European Commission to allow those affected time to react.
Transforming this continent’s digital asset environment would broadly impact every cryptocurrency market, including niche and up-and-coming markets like DeFi. (More on that below.)
2. Proof-of-Stake Gains Technological Ground
There’s a new mode of distributed consensus in town. Proof-of-Stake, a consensus algorithm that uses a pseudo-random election process to select nodes to validate the next blocks, has developed to address problems with the Proof-of-Work algorithm. Significantly, the PoS algorithm incentivizes users to “lock” their coins into a network by awarding transaction fees rather than more coins.
Proof-of-Stake crypto is still a minority, representing about 15 percent of cryptocurrency’s total market cap, but crypto platforms are increasingly trending toward adoption of the Proof-of-Stake method of distributed consensus. Close to half of the top ten crypto assets by market cap have already adopted or are moving toward fully adopting PoS methodology.
Much of the growth of crypto’s market cap in 2020 can be attributed to Proof-of-Stake blockchains. Most notably, Ethereum—the cryptocurrency with a market cap second only to Bitcoin—transitioned from using Proof-of-Work to Proof-of-Stake when it launched its Beacon Chain, as part of Ethereum 2.0, in December.
Also in the top-five by market cap, the crypto asset Chainlink announced in 2020 that it is transitioning to the PoS method of consensus. Polkadot, the largest cryptocurrency already using only PoS methodology, has staked more than $3 billion, while the value of the PoS coin Cardano has grown by 1200 percent since March.
3. Decentralized Finance Market Grows 14X
Heard of DeFi yet? It’s short for decentralized finance—an experimental approach to finance that is open and applicable to every kind of financial service (think traditional banking, retail investing, purchasing insurance, and more). While DeFi is still a niche in the crypto market, that is rapidly changing.
The value of assets “locked” into DeFi systems exploded from USD$1 billion to greater than $14 billion just in 2020. (Of note, while the number of users of DeFi platforms also increased, that rise was markedly less than the rise of the value of the DeFi assets themselves.)
DeFi is rapidly gaining in popularity because it is built on principles of transparency that are attractive to many. And because DeFi is so widely applicable: “dapps” (apps built on decentralized technology, and another word to become familiar with) enable users to perform a wide array of complex transactions with crypto.
With DeFi, users can create stablecoins, lend and borrow crypto coins, earn and pay interest on crypto assets, go long or short (bet for or against) cryptocurrencies, and implement other advanced and automated investment strategies. With so many uses and so much value already accrued, DeFi has arrived and is here to stay.
However 2021 plays out, the continued advancement and acceptance of the cryptocurrency market by all stakeholders is sure to continue apace.