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Crypto 2021 Outlook In-Depth Industry Insights into Markets, Technology and Regulation
About
Over the last twelve months, the
cryptocurrency space has continued
to develop with market movements
and new innovations. Bitcoin Suisse
Research examines the latest indus
try trends and major blockchain
developments in the Bitcoin Suisse
Crypto Outlook 2021, with insights
into macroeconomic factors, block
chain interoperability and conver-
sations with pioneers from the crypto
and traditional finance world.
2
Contents
Impressum Dr. Raffael Huber
Bitcoin Suisse AG
Grafenauweg 12
5 Megatrends for 2021 8
6300 Zug
Switzerland
Giles Keating
Bitcoin Suisse (Liechtenstein) AG Macroeconomics in Covid
Aeulestrasse 74
9490 Vaduz
and after: the Perfect Storm 18
Liechtenstein for Cryptocurrencies
Calls from within Switzerland
(toll-free): Fatemeh Shirazi
0800 800 008
Interoperability: Where are
Calls from abroad:
+41 41 660 00 00
Contact us:
we now and what can we 25
info@bitcoinsuisse.com expect for 2021?
Discover Our Services:
Rune Christensen
Prime Brokerage � Custody
Collateralized Lending �
Payments � Staking �
Interview with
Rune Christensen
30
Tokenization
bitcoinsuisse.com
Lars Hodel & Thiemo Pirani
Contributors:
The Rise of DeFi:
Regulatory Thoughts
35
Raffael Huber
Giles Keating
Fatemeh Shirazi
Rune Christensen Dr. Guilherme Sperb Machado
Lars Hodel & Claude Müller
Thiemo Pirani
Guilherme Sperb Machado
Neo Blockchain: 40
Claude Müller What's Next?
Roger Studer
Design & Concept Roger Studer
Loris Haller Interview with
Roger Studer
48
Printing:
Printoset, Zürich
Printed in Switzerland
3
Contributors
Dr. Raffael Huber Giles Keating Fatemeh Shirazi
Dr. Raffael Huber is leading the A 30-year veteran of Credit Fatemeh Shirazi is interim CTO
Bitcoin Suisse Research Depart Suisse, Giles Keating is an inter at Web3 Foundation, where she
ment, which conducts research nationally recognized thought is also leading the research
on a broad variety of topics rang leader and market commenta team of 10 researchers that
ing from blockchain data ana tor with exceptional experience.
consists of experts in Blockchain
lytics to market opportunities. He was Credit Suisse’s Global
Technologies, Cryptography,
He is in charge of Bitcoin Suisse Chief Economist for Investment
Mathematics, Privacy, Formal
Decrypt, which provides focused Banking and later Global Head of
Security, Behavioural Economics,
insights into selected subjects Research for the bank’s Private
Micro-economics, and Network
ranging from cryptocurrency fun Banking and Wealth Manage
ing. Before joining Web3 Foun
damentals to market analyses. ment division. Giles Keating
He holds a PhD from ETH Zürich. brings a wealth of knowledge dation, she obtained her PhD
in capital markets, investment from KU Leuven in the renowned
banking and economic analy Computer Security and Indus
sis to his role as Board Member trial Cryptography (COSIC) group
at Bitcoin Suisse. Before join focusing on on anonymous com
ing Credit Suisse in 1986, Giles munication systems and also
Keating was a Senior Research worked as student assistant at
Fellow at the London Business the German Research Center for
School. He received an M.A. in Artificial Intelligence (DFKI) in the
Philosophy from St. Catherine’s Secure Systems group.
College, Oxford and an M.Sc. in
Mathematical Economics and
Econometrics from the London
School of Economics.
4
Rune Christensen Lars Hodel Thiemo Pirani
Rune Christensen is the Lars Hodel joined Bitcoin Suisse Mr. Thiemo Pirani joined Bitcoin
co-founder of MakerDAO, which AG in November 2017 as Head Suisse AG in October 2019 and
governs the Maker Protocol by Legal and Compliance, where is working part-time as legal
deciding on key parameters. The he ensures that operations are trainee. He obtained a master’s
Maker Protocol issues Dai, the in conformity with legal and degree in law at the University
world’s first fully decentralized regulatory requirements and of Zurich in October 2020. His
stablecoin on Ethereum. Rune is the related risks are managed interest in cryptocurrencies was
also the CEO of the Maker Foun accordingly. Before joining sparked in the university course
dation, which is part of the Maker Bitcoin Suisse AG he was work on monetary and currency law.
Community and helps to boot ing at a Swiss systemic rele
strap MakerDAO, fuel its growth, vant bank with a specialization
and drive it toward complete on regulatory and tax compli
decentralization. ance, as tax consultant in a Big
4 company, and in the legal
department of a globally lead
ing medtech firm, adding up to
more than 8 years of relevant
experience. Lars Hodel studied
in Switzerland, France and the
Netherlands. He holds a mas
ter’s degree in Law (MLaw) from
the University of Berne and a
postgraduate master’s degree in
International Business Law from
Tilburg University (LL.M).
5
Dr. Guilherme Sperb Machado Claude Müller Roger Studer
Dr. Guil. is a researcher, entre Claude is a lead software engi Roger Studer was Head of Von-
preneur, and software engi neer, blockchain specialist, and tobel Investment Banking for
neer. He is a serial open-source passionate about open-source decades and a global thought
project contributor and brings communities. He holds a M.Sc. leader in the structured product
15 years of experience in the in Computer Science from the industry. He also served as a
software industry and academic University of Zürich, with a focus member of the Vontobel Group
projects. He holds a Ph.D. in on blockchain and electronic Executive Board. Previously, he
Computer Science from the Uni voting, including zero-knowl held senior positions in wealth
versity of Zürich, where he also edge proofs. Claude is currently and asset management as Head
contributed to his first block a tech builder at AxLabs, leading of Quantitative Asset Allocation
chain project in 2013. Guil is an projects from the conceptual at Swiss Life/Rentenanstalt and
active technical advisor in the phase to execution. He has been as Head of Portfolio Manage
Swiss blockchain scene, part working with blockchain technol ment and Research at ABN
of the advisory board of several ogy for over 3 years – mainly on AMRO. He is currently Chairman
well-known companies. Besides tools and infrastructure for the of the Board of Directors of
being a tech builder at AxLabs, Neo Blockchain. Before joining Studer Family Office AG, Vice
Guil is constantly on the hunt AxLabs, he worked as a business President of the European Struc-
to discover and materialize the software developer at BSI AG. tured Investment Products
next big thing in the blockchain Association (EUSIPA) in Brussels,
space. Member of the Board of Direc
tors of Bank Vontobel Europe
AG in Munich and a member of
the Board of Directors of Deut
sche Börse Commodities GmbH
in Frankfurt am Main.
6
7
Mega-
Trends
for 2021
Author: Dr. Raffael Huber
8
5 MEGATRENDS
■ Institutional adoption of crypto-
The year 2020 has brought currencies as a component
major progress1 to the in a multi-asset portfolio is set
crypto world. The market to grow.
structure has seen further
■ Ethereum 2 is likely to become
improvements in terms of
the largest staking market, with
capacity and liquidity. Fun implications such as the devel
damental breakthroughs opment of an ETH2 futures and
in blockchain technology higher ETH borrowing and lend
ing rates in DeFi.
and cryptography have hap
pened, such as with the ■ The stablecoin market has to
launch of Ethereum 22 or the potential to grow much larger
Polkadot, and public block but will have to comply with new
chains have found their first regulations for the sector.
real product-market fit in
■ The first Parachain Lease Offer
the form of decentralized ings on Polkadot and Kusama
finance (DeFi)3. will draw the attention of crypto
investors and lead to interesting
This article attempts to dynamics in DOT markets.
spot and outline the next
■ New decentralized finance pro
big trends – what will drive tocols will further illustrate the
crypto markets in 2021? power of composability and – if
What will the crypto land successful – grow the space by
scape look like? an order of magnitude.
9
Among the first ones to make their invest-
ment public was Paul Tudor Jones, who
wrote about it in his investor letter4 in May
2020 and allocated a low single-digit amount
to Bitcoin as a hedge against inflation. Oth-
ers, such as Stanley Druckenmiller5 or Black-
Rock’s Rick Rieder6, followed later with
positive statements or allocations towards
Bitcoin. It is reasonable to assume that this
trend continues in 2021 and more investors
decide to allocate to Bitcoin both strategi-
cally and tactically.
“[Bitcoin] scores 66% of gold as
a store of value [in our internal
assessment], but has a market cap
that is 1/60th of gold’s outstanding
Trend 1: Institutional value. Something appears wrong
here and my guess is it is the price
Adoption of Crypto of Bitcoin.” – Paul Tudor Jones
“Slowly at first, then all at once” – there is
hardly a phrase that better describes the swift
change of heart that many prominent inves- On top of that, a few companies started to use
tors had in 2020 towards cryptocurrencies. Bitcoin as a treasury reserve asset. At the
Bitcoin has become an investable asset, and time of writing, around 100’000 BTC (or
cryptocurrencies as an asset class which out- about 0.5% of the supply) are held by pub-
performed other asset classes by a fair margin licly traded companies7, such as MicroStrat-
can no longer be ignored. The default question egy8 (70’470 BTC), Galaxy Digital (16’651
for portfolio managers seems to be switch- BTC) or Square9 (4’709 BTC). Another mas-
ing from “Why should I invest in Bitcoin?” to sive amount of BTC is held by the Grayscale
“Why shouldn't I invest in Bitcoin?”. Bitcoin Trust, which now owns close to
600’000 BTC (or about 2.7% of the supply)
and has experienced rapid inflows in 2020,
400% 474% probably not least due to arbitrage between
350% Bitcoin spot markets and the GBTC pre-
300%
250% 304%
mium10 of up to 40% to its net asset value.
200%
150%
100%
47%
50% 25% 17% 14% MSTR 70‘470
3%
0%
GLXY 16‘651
Ethereum
Bitcoin
NASDAQ
100
Gold
S&P 500
MSCI EM
Equities
SHY US
Equity
SQ 4‘709
Hut-8 2‘954
VYGR 1‘239
Illustration 1: Cryptocurrencies have outperformed other
RIOT 1‘175
major asset classes by multiples in 2020. Bitcoin has
0 20000 40000 60000 80000
returned over 300%, whereas Ether managed to get close
to 500%. Source: coingecko.com, Yahoo Finance, Bitcoin
Suisse Research. Illustration 2: Of all publicly traded companies,
MicroStrategy (MSTR) has allocated most aggressively
towards Bitcoin and now holds more than 70’000 BTC,
purchased for a total of $1.125 billion. Source: bitcointrea-
suries.org, Bitcoin Suisse Research.
105 MEGATRENDS
The reasons for an investment into B
itcoin and such portfolios might increase due to rebal-
other cryptocurrencies vary. An often-cited ancing and more stringent risk management
reason is the current and future macroeco- considerations.
nomic environment, in which cryptocurren-
cies are ideally placed, as outlined in the
dedicated article on “Macroeconomics in Trend 2: Ethereum 2
Covid and after: the Perfect Storm for Cryp-
tocurrencies” by Giles Keating. Bitcoin is
and Staking
also seen as an alternative and challenger to
gold, and cryptocurrencies in general as a bet
on the future importance of blockchain tech-
nology in the world.
“Do I think it will take the place
of gold? Yes I do, because it’s so
much more functional than pass
ing a bar of gold around.”
– Rick Rieder
Additionally, the regulatory environment for
cryptocurrencies is becoming clearer and
provides the necessary legal certainty for
investments into the asset class. Professional
custody is largely a solved problem, and
sophisticated trade execution techniques
enable even larger investments. Following
positive remarks11 from the CFTC Chairman The Beacon chain of Ethereum 2 was finally
Heath Tarbert about Ethereum, the CME will launched on December 1 and represents a
also launch ETH futures12 in February, which seminal achievement for blockchain technol-
will further improve market access beyond ogy. This is the first stage14 (or Phase 0) of
Bitcoin. a full deployment of Ethereum 2 and brings
Recently, S&P Dow Jones Indices also the possibility to stake ETH to earn stak-
announced13 that they would create indices ing rewards. These rewards depend on the
for various cryptocurrencies. This might overall amount of staked ETH in the net-
lay the groundwork for a long-awaited Bit- work (the formula can be found here15); cur-
coin ETF, applications for which have so far rently, around 1.7 million ETH were sent to
always been declined by the SEC, mainly due the deposit contract16 for the beacon chain,
to price manipulation concerns. A trusted resulting in an approximate staking reward of
price source might alleviate these concerns. 13.6%. This reward is denominated in ETH,
Another implication of institutional so any effective returns in USD (or EUR,
adoption of Bitcoin and other cryptocurren- CHF) highly depend on the ETHUSD price.
cies is that correlations to other asset classes
might increase in the future. The holder struc-
ture of cryptocurrencies currently still differs
significantly from that of other asset classes,
which likely plays a role in the uncorrelated
nature of the asset class. As cryptocurrencies
are more regularly included in multi-asset
portfolios, the correlation to other assets in
115 MEGATRENDS
converting staked ETH to liquid ETH might
30%
develop both in centralized and decentral-
25%
ized manner – in this case, the conversion
20%
rate between the two variants does not need
15% 1.7 M (14%)
to remain at 1:1 (this rate is only ever guar-
10%
5%
anteed one-way for ETH to ETH2 through
the deposit contract), and the degree to which
0 5M 10 M 15 M 20 M
de-pegging from 1:1 happens could serve as
Illustration 3: Ethereum 2 staking rewards start out rela- an indicator of perceived counterparty risk
tively high at >20% and drop off rapidly towards ca. 3% (either of a smart contract or a centralized
as more ETH gets staked. At the time of writing, rewards
stand at circa 13.6%. Source: GitHub, Bitcoin Suisse
service provider).
Research. As more ETH gets staked and rates start
to stabilize, this will also have an impact on
ETH is set to become a dominant player in yields on ETH in DeFi. Currently, the lend-
the staking landscape – it will be by far the ing and borrowing rates18 for ETH stand at
most valuable proof-of-stake blockchain, ca. 0.1% and 2% – over time, these should
and staking returns compare well to other see a moderate increase towards the rate of
stakeable currencies. staking rewards, or more precisely: towards
the expected average staking rewards rate
16% until transferability minus the costs of run-
14% ning an ETH2 validator (accounting for the
12%
10%
tail risk of getting slashed). The presence of
8% more tokenized Bitcoin on Ethereum (such
6%
4%
as wBTC) could accelerate this process, as
2% Bitcoin can serve as collateral in DeFi lend-
0%
KSM ETH2 DOT ATOM ALGO DASH XTZ ADA ing protocols to borrow ETH, stake it, and
earn staking rewards. Similar mechanisms
Illustration 4: The highest staking rewards are currently could unlock for other proof-of-stake chains
available for KSM (14.1%), ETH2 (13.6%) and DOT should they either develop an own DeFi eco-
(13.5%). Source: stakingrewards.com, Bitcoin Suisse
Research.
system or build a bridge to the existing one
on Ethereum.
At the moment, however, and until later
phases of Ethereum 2 enable transfers of
the cryptocurrency on the new blockchain,
staking ETH represents a vote of confidence
in the development of Ethereum and comes
with an unknown lockup period. The Ethe-
reum staking equilibrium will only fully
establish, and the market grow to its real size,
once full convertibility is enabled. Whether
or not that happens in 2021 is yet unclear. An
additional consequence of large ETH lock-
ups might be increased volatility in all ETH
markets, as liquid ETH gets deployed for
staking instead.
In the early stages of Ethereum 2 staking, Trend 3: Stablecoins
an ETH2 futures market might also develop. Stablecoins have had a phenomenal year in
Investors in this market will likely demand 2020. The total stablecoin supply grew from
a liquidity premium17, and ETH2 futures ca. 5 billion to more than 25 billion, and they
might trade at lower prices than ETH due to represent an important interface between the
the lockup period. Additionally, markets for fiat currency world and the crypto ecosytem.
1225 B
next year with a minimal version and a sim-
20 B
ple USD-pegged stablecoin. Over the next
USDT
USDC decade, however, privately issued stable-
15 B
DAI
BUSD
coins that are convertible to CBDCs through
10 B
PAX intermediaries might still become the go-to
5B TUSD
HUSD interface between CBDC ledgers and public
0B
02 04 06 08 10 12 blockchains.
Illustration 5: The total supply of stablecoins grew sig-
nificantly in 2020. Tether (USDT) remains the market
leader with ca. 80% market share. Source: coingecko.com,
Trend 4: Parachain
Bitcoin Suisse Research. Lease Offerings
The majority of the stablecoin supply is on on Polkadot and
Ethereum. One catalyst for this increase has
been the DeFi hype during the summer, where
Kusama
high yields,19 often >100% p.a., were avail-
able for providing USD stablecoin liquidity
to protocols. This led to high demand and
an inflow of capital to the space. Stablecoins
pegged to the USD remain extremely domi-
nant, and stablecoins pegged for example to
the EUR have a negligible market cap. This
may change in the future – in principle, the
building blocks available in DeFi could be
customized to allow for efficient forex trad-
ing. Demand might come, for example, from
arbitrageurs that operate in the (fairly liquid)
BTCEUR or ETHEUR pairs on centralized
exchanges, or – in the long run and depend-
ing on the competitiveness of exchange rates
– commercial and speculative forex traders.
If such demand arises, so will the supply of Polkadot launched25 its long-awaited mainnet
non-USD-pegged stablecoins. in May 2020, and shortly after that handed
There might be regulatory headwinds over governance of the protocol to the com-
coming for stablecoins, though. As govern- munity. Polkadot is set to become an import-
ments and central banks around the world ant player for blockchain interoperability – a
gear up for the launch of their own central topic more closely described in the dedicated
bank digital currencies (CBDCs) in the wake article “Interoperability: Where are we now
of the inefficiencies in the current financial and what can we expect for 2021” by Fatemeh
infrastructure exposed by the pandemic, pri- Shirazi.
vately issued stablecoins will receive more Polkadot’s architecture (and that of its
regulatory attention. As a first mover in the “canary network” Kusama) includes a relay
CBDC space, China has already banned20 chain and parachains. Parachains are cus-
private stablecoins backed by the Renminbi. tomizable blockchains for each use case,
The EU has proposed21 regulations that such as high transaction throughput or strong
would also affect stablecoins22 and while the privacy. The relay chain enables pooled secu-
U.S. is exploring23 a digital currency as well, rity guarantees: Instead of securing each
no clear direction for private stablecoins has parachain individually, this duty can be out-
been given so far. How large the initial back- sourced to the relay chain, which improves
lash can be was demonstrated by Libra (now the capital efficiency and likely reduces the
Diem), which will launch24 in the first half of overall required security budget.
13Collators
Parachain
2
Bridge
Collators
Parachain Relay
1 Chain
Virtual Parachains
(e.g. Ethereum)
Parachain
3,4,...
Illustration 6: Simplified depiction of Polkadot’s archi-
tecture. The relay chain sits at the center and coordinates
with various parachains through the help of collators.
Other blockchains can be attached through bridges.
Source: Polkadot Whitepaper, Bitcoin Suisse Research.
Projects looking to become a parachain of Trend 5: Growth
Polkadot will need to lock up DOTs, Pol-
kadot’s native coin, for 6 to 24 months. This
of Decentralized
lock-up is in direct competition to the stak- Finance
ing of DOTs, which currently yields around 2020 was the year of DeFi – many projects
13.5% annually (denominated in DOT). How- that were quietly building over the past three
ever, the economics of staking in Polkadot years have exploded in popularity, which was
are designed in a way to encourage26 – as soon best seen in the skyrocketing29 total value
as parachains go live – a 50% staking rate of locked (TVL) in various DeFi protocols.
the total DOT supply, such that up to 50% of
DOTs are available for parachain lock-ups.
Parachain slots are assigned in candle 16 B 10 M TVL USD
9M ETH
auctions,27 where interested parties can bid 14 B
8M
Total Value locked (USD)
12 B
7M
on the slot; in the medium term, there will
Total ETH locked
10 B 6M
likely be up to 100 slots available. Since 8B 5M
4M
6B
projects looking to become a parachain will 4B
3M
2M
often lack the required DOTs, they can look 2 B. 1M
0B 0M
to crowdsource28 these from other DOT hold-
0
20
0
0
0
0
-2
-2
-2
-2
-2
r-
b
n
g
ct
ez
Ap
ers and conduct a Parachain Lease Offering
Ju
Au
Fe
O
D
(PLO). This will require incentivization, for
example in the form of tokens, that can make Illustration 7: The total value locked in DeFi protocols con-
up for the forgone staking rewards. tinues to rise, and currently, more than 7 million ETH are
deployed across various protocols. Source: DeFipulse.com,
PLOs will likely receive a lot of attention Bitcoin Suisse Research.
in 2021, both on Polkadot and Kusama. The
returns that participants in the first few PLOs This trend is likely to continue in 2021 – how-
obtain might help in the economic incentive ever, as mentioned above under Trend 2, DeFi
design for later offerings and will serve as protocols will have to compete with ETH stak-
an indication how they relate to the staking ing for liquid ETH. Still, expansion of the
rewards rate. In principle, the game theoret- DeFi universe through introduction of new
ical equilibrium for returns (in DOT) should projects happens quickly and will continue to
lie slightly above the staking rewards rate, attract liquidity for as long as yields remain
accounting for the longer lock-up period (at high, or whenever composability between
least 6 months in PLOs, 28 days for stak- protocols opens up new possibilities.
ing), project-specific execution risks, and the One area that seems underexplored so
absence of slashing risk. far is DeFi derivatives. There are early exam-
14ples30 of interest rate swaps that would allow will use the layer 2 solution Optimism in the
to trade floating rates (which are the norm future. As a partial migration of some proto-
in DeFi) for fixed ones – which is currently cols might fracture the ecosystem and reduce
only possible through centralized platforms composability, it is likely that this migration
that offer both perpetual swaps (which come takes longer than expected as layer 2 solu-
with a variable funding rate31) and futures tions prove themselves stable and secure, but
contracts (with a fixed annualized premium then happens quite rapidly once it starts.
or discount upon opening a position). Sim-
ilarly, various protocols32 aim to capture the
on-chain options market.33 Such upcoming Conclusion
derivatives platforms will likely battle for
liquidity through governance tokens and
The year 2021 is set to be
liquidity mining.34 exciting on all fronts – from
What really sets DeFi apart from tradi-
tional financial infrastructure, though, are
broader recognition of cry-
the immediate composability benefits that ptocurrencies as an asset
new projects gain. In DeFi, a structured prod-
uct might be just a “zap”35 that, for example, class to fundamental ad-
simultaneously trades various options and vances for blockchain tech
futures in a single transaction using multiple
protocols. A layered infrastructure is forming, nology. New components of
with lending and borrowing platforms (such as the ecosystem, such as
Maker, Compound or Aave) and decentralized
spot exchanges (such as Uniswap) as the base Ethereum 2 and staking or
layer upon which others can build and inno-
Polkadot’s Parachain Lease
vate in a permissionless fashion.
The yields in DeFi on USD stablecoins Offerings, will allow to
can be thought of as the value of the dollar
in the crypto ecosystem (plus smart contract
observe the game theory
risk, especially for the newer projects), or - to behind them unfold in real
draw an analogy to traditional terminology -
as the implied cross currency basis of crypto-
time in the markets. The
dollars against the dollar. An indication for “crypto experiment” is
that has existed long before DeFi took off, in
the form of centralized USD borrowing and
slowly maturing and trans
lending markets, as well as in the futures con- forming into a powerful eco-
tango or backwardation, which enables yield
generation from cash and carry trades. His- system that can disrupt
torically and perhaps naturally, these yields what is viewed as a store of
increased during bull markets and decreased
during bear markets. In the long run, how- value, how the financial
ever, as capital flow to crypto becomes even infrastructure is construct-
easier, the trend for those yields should be
downwards and closer to traditional USD ed and how efficient and
interest rates.
elegant business pro
Last, but not least, as limited transactions
throughput on the Ethereum chain imposes cesses could be in the
some restrictions on the use of DeFi due to
high gas fees and hence transaction costs, a
digital age.
migration to layer 2 solutions might happen –
Synthetix is an early adopter36 in the space and
15GILES KEATING
16GILES KEATING
Macroeconomics in Covid
and after: the Perfect Storm
for Cryptocurrencies
Author: Giles Keating
Introduction
The Covid crisis has caused great macro-economic
upheaval: soaring budget deficits and government
debt, accompanied by new rounds of monetary easing
on top of already ultra-easy stances. Alongside, there
have been major structural changes: a surge in online
shopping and supporting infrastructure, ranging from
■ The global debt explosion delivery logistics to body-scanning apps for clothes
purchases; declining use of cash and a new round of
raises longer-term inflation pressure on many banks; a new phase of the tech cold
risk, and Bitcoin is increas war, as China races to develop its own world-beating
chips; and an extraordinary change in travel and work
ingly seen as a credible patterns, evidenced in the collapse in flights, the boom
hedge against this in video calls, and the pop-up of cycle lanes across the
world’s cities.
Cryptocurrencies find themselves at the heart of
■ Negative yields move out this upheaval, reflecting the features hard-wired into
them by their creators. Bitcoin’s pre-determined path
along the credit and dura towards a future fixed supply stands in stark contrast
tion curves, enhancing the to the unlimited potential to expand conventional cur-
rencies; newer cryptocurrencies offer functionality and
allure of cryptocurrencies earning power undreamt of in old-fashioned money;
and central bank digital currencies, a year ago of lit-
tle more than theoretical interest, have quite suddenly
■ Central bank digital cur started to become a reality, in a way that may yet make
them the perfect complements, rather than competitors,
rencies start to appear, and to their private counterparts. 2021 starts with a “perfect
may potentially have a pos storm”, in which these fundamental characteristics of
cryptocurrencies interact with the macro and sectoral
itive interaction with private effects of Covid, to broaden the their appeal far beyond
cryptocurrency ecosystems the early enthusiast base, out to a broader and growing
range of private and institutional investors.
This article is structured to consider in turn how
each of the main macro and sectoral effects of Covid
interacts with cryptocurrencies, at the end drawing the
different areas together into a whole that is greater than
the sum of the parts.
17GILES KEATING
Macro – soaring debt, monetary ease, needed to bring it down faster.
and what about inflation? Yet, the risk that this extraordinary debt
Developed-economy government debt at the surge becomes dangerously unsustainable
end of 2020 is now estimated at 125%. (IMF lies in the future; for now, it seems almost
figures, gross basis). That is based on figures benign, and the reason is that the cost of debt
published last October, when the full extent service has barely risen or has even fallen,
of the second wave of Covid had not become as a result of the parallel policy of ultra-easy
apparent, so the eventual figure is likely to be money. Central banks around the world have
higher. abandoned the tentative steps towards tight-
ening underway before the crisis and instead
embarked on new rounds of easing. Zero or
negative rates are now the global developed
economy norm, and even many emerging
countries have astonishingly low rates; quan-
titative easing has been expanded, not only
in size but also in scope, with central banks
buying assets that would have been unthink-
able a few years ago, ranging from equities
(Japan), to derestricted quantities of periph-
eral-economy bonds (Europe), and corporate
Illustration 1: Global debt has exploded in 2020 and junk bonds (US).
and now stands at around 125%. Source: IMF, Bitcoin These monetary measures have been
Suisse Research.
highly successful in supporting asset prices,
driving equity market multiples to high lev-
To give some historical context, the fig- els and compressing credit spreads. This has
ure was 70% twelve years ago, just before the undoubtedly helped to minimise the depth of
financial crisis, by the end of which it had the Covid economic slump, but at the cost of
lurched up to around 106%. After that, vir- over-valuing some assets in ways that inevita-
tually no progress was made in reducing this bly distort resource allocation. For consumer
debt burden, and so the effects of the Covid good prices, it has probably helped to mitigate
crisis and the financial crisis compound the risk of deflation, we don’t really know, but
together. it clearly has not yet created an inflation.
The debt burden varies widely across And, this lack of inflation is just as
countries, of course, with the US at 131% and well, for anything more than mild inflation
Japan more than double that, while Germany could face central banks with an unpleasant
is at 73% and Switzerland just below 50%. dilemma: either they tighten policy (pushing
These figures would be lower, if government rates up and ending asset purchases), which
assets are netted off, and substantial portions would trigger an economic downswing and
of this debt is now held by central banks. raise the cost of servicing the debt mountain;
Nevertheless, the big picture is clear: gov- or, they pretend the inflation isn’t happen-
ernment debt was already very high before ing, which works for a while until they lose
Covid, and it has soared as a result of the credibility and bond yields then soar out of
virus. The surge represents partly the lost their control – unless they impose “finan-
tax revenue and increased benefits that oper- cial repression”, with exchange controls and/
ate automatically in a recession, and partly or rules that force domestic investors to buy
new measures to counter the economic weak- government bonds at low yields, effectively a
ness. There can be some improvement as the confiscatory wealth tax.
economy recovers, but it will be a grinding So, how likely is the risk of such infla-
and slow process, and there are few signs of tion? At present, not very likely, due to the
the political will to take the hard decisions slump in demand caused by Covid. And there
is certainly a good chance that this slump will
18GILES KEATING
be followed by a gradual economic recovery, showing little strong uptrend in a year when
allowing central banks to start gently tight- cryptocurrency prices, though volatile, did
ening policy over a period of several years, trend upwards. One prosaic reason for that is
keeping inflation under control and avoiding that global jewellery demand has been weak,
the extreme scenarios just mentioned. But for a number of reasons, notably the decline
there are also darker scenarios. The “scar- in formal weddings in India and elsewhere;
ring” from Covid, with lower-skilled and central bank demand has also been weak, for
older people driven out of the workforce and reasons that are not clear. But another key
companies bankrupted, reduces economic reason for the divergence between gold and
capacity and may run the economy into cryptocurrency prices is that gold not only
the inflationary buffers much earlier than pays no interest, but actually costs money to
expected, unless countered by well-targeted hold. By contrast, cryptocurrency holdings
re-training programmes. The move towards can be used to generate substantial income,
more nationalism in politics, and the new and we now turn to consider this.
Cold War between the US and China, may
encourage uncompetitive oligopolies that Zero interest rates, the positive yield
can push up prices easily – the recent anti- on cryptocurrency holdings, and the
trust action against the Google ad-monopoly future of conventional banks:
appears to go against this, but has yet to be While near-zero or outright negative inter-
shown to have real teeth. est rates were already part of the “new nor-
The bottom line is that we just don’t mal” when Covid struck, the monetary policy
know how big is the risk of an inflation large response to the virus has intensified their
enough to tip the debt mountain from benign effect in a major way. In countries such as
to deadly – all we can say is that it’s a much Switzerland, some banks have lowered the
bigger risk than it was before Covid. thresholds on which they charge depositors
interest, but more profoundly, and globally,
Bitcoin in an era of debt and inflation: the action of the US Federal Reserve and
Bitcoin could have been designed as the others in buying investment grade and junk-
perfect asset to protect investors from this rated bonds has compressed credit spreads.
debt-inflation spiral – and indeed, the need The result is that in many currencies, it is
for such an asset does appear to have been now barely possible to earn positive yields
one of its original inspirations. Because the on fixed-income portfolios even by taking
supply of additional Bitcoin rises at a reduc- substantial credit and/or duration risk. Even
ing rate and eventually stops, it is hard-wired emerging market debt portfolios now offer
to have a deflationary bias that no fiat cur- yields that would in the past have been asso-
rency could ever have. Provided there is ciated with currencies such as the Euro or
ongoing demand to hold Bitcoin, as an Swiss Franc.
investment and/or transactions asset, that has
at least a loose positive correlation to over-
all nominal global GDP, then both real eco-
nomic growth and inflation will, over time,
create a tendency for its trend price to rise.
And the risk of “financial repression” men-
tioned above could add an extra impetus to
this, for Bitcoin holdings, whether permitted
or not permitted under dystopian future sce-
narios, could be difficult to detect.
Gold has traditionally been the asset held Illustration 2: Earning a positive yield on fixed-income
by investors concerned about runaway debt portfolios is barely possible, even by taking substantial
credit and/or duration risk. Source: investing.com, Bitcoin
and inflation, but interestingly, it was the Suisse Research.
“dog that did not bark” in 2020, with its prices
19GILES KEATING
One stark illustration of the problem now The combination of staking/fee and DeFi
faced by fixed income investors is that 26% income allows holders of a cryptocurrency
of the market capitalisation of debt globally, portfolio to potentially earn high single- or
over $17 trillion, now has a negative yield. low double-digit percentage income. This
is highly appealing in a zero-interest world.
Especially combined with supply either
being strictly limited, as in the case of Bit-
coin, or for other cryptocurrencies set by
pre-determined rules, which in some cases
are linked to transactions volumes (as is pro-
posed for Ethereum). As this yield potential
on a limited-supply asset has become appar-
ent to both family offices and institutional
investors, it is unsurprising that the universe
Illustration 3: Over $17 trillion is invested in negative of cryptocurrency holders has rapidly started
yield-bearing assets (November 2020). Source: Bloomberg to broaden out from the earlier enthusiastic
Barclays Global Aggregate Negative Yield Debt Index,
Bitcoin Suisse Research.
pioneer core, supporting demand.
One way of thinking of this income is that
This new lurch downwards in the ability to it gives to cryptocurrency holders the profits
earn positive yields on mainstream port- and wages that accrue to shareholders and
folios has coincided with income-earning employees in a conventional banking system.
developments in the cryptocurrency space, In this sense, a cryptocurrency is a kind of
long in the pipeline, that became a reality in co-operative, with users both paying to use it
2020. Holders of some smaller cryptocur- (explicitly via fees or implicitly via currency
rencies can already earn income from stak- creation), and receiving income from its use.
ing and from transactions fees, and Ethereum The corollary of this is that cryptocurren-
2 looks set to join the ranks in the near future. cies pose an existential threat to the existing
Because this staking/fee income is available business models of conventional banks and,
to any holder, without the need for the com- perhaps to a lesser extent, payments provid-
puting power needed to validate transactions ers. The current world of zero interest rates,
under the proof-of-work system used in Bit- compressed credit spreads and flat yield
coin and Ethereum 1, it quite suddenly cre- curves adds to this pressure, since banks tra-
ates a new incentive for any investor to hold ditionally made their profits by intermediat-
cryptocurrencies. In parallel, decentralised ing credit and through asset-liability maturity
finance (DeFi) transactions, including lend- mismatch. 2020 saw reports suggesting that,
ing, that allow holders of a wide range of for the first time, a merger between the two
cryptocurrencies, including Bitcoin, to earn biggest Swiss banks might now be a serious
(further) income, has gone from a theoreti- possibility. While the outcome of any par-
cal possibility to a reality, albeit initially on ticular negotiations cannot be predicted, the
a small scale. structural pressure for consolidation, and
The potential is for both staking/fee and for focus on client-facing activities that can-
DeFi income to grow over time, possibly not be replaced by decentralised blockchain
very rapidly, reflecting rising volumes of real transactions, suggests that a new wave of
economy transactions, both by retail consum- mergers could appear in a number of coun-
ers and in the business to business area, and tries before long.
also financial transactions. The jump in the
price of Bitcoin and other cryptocurrencies
when PayPal announced their availability on
its platform, albeit with initially restricted
transferability, demonstrated investors focus
on this issue.
20GILES KEATING
Central Bank Digital Currencies. kind of total separation. However, this would
Another development in 2020 has been the stymie the development of the technology,
acceleration of activity by central banks since it seems unlikely that the central banks
in provision of digital currencies. China would allow features such as broad DeFi to
launched a digital Yuan, initially to a trial be developed using their own digital curren-
group of users, Singapore followed suit later cies, indeed it is challenging to see how this
in the year, and while other countries have could be made compatible with the security
made no commitment, periodic comments and control that is clearly needed for an offi-
have suggested that a topic that was merely cial unit. It therefore seems more likely that
the subject of working groups and discussion the central banks will allow interaction, per-
papers early in the year, may be moving rap- haps limited at first and then broadening, so
idly up to the decision-making boards. Rea- that the full potential of both decentralised
sons for this could include the rapid spread finance and also direct real economy applica-
of cashless transactions during Covid, as well tions such as supply-chain management can
as the desire of the central banks to provide be developed using the cryptocurrency units.
a secure and strong anchor for the rapidly This scenario would likely be positive for
growing technologies centred around cryp- cryptocurrencies, since they would become
tocurrencies. Another intriguing possibility clear complements to the official digital cur-
is that central bank digital currencies could rencies, allowing the operation on public
be used for extraordinary monetary policies blockchains of services such as lending, cap-
previously possible only in economic theory, ital issuance, and the tracking of and paying
such as a “helicopter drop” of extra money to for the online purchases that have boomed
all holders, or its opposite, the imposition of during Covid. As such real and financial
negative rates on everyone – though the lat- transaction volumes grew, they would tend to
ter might be seen as confiscatory, and under- put upward pressure on the prices of crypto-
mine public confidence in the new money. currencies.
Many open questions remain about these
central bank currencies, notably (i) whether
they will be available only to intermediary
institutions, direct to the public, or a hybrid
that allow public holdings with access via
an intermediary; (ii) whether central banks
will allow private stablecoins denominated
in their local currency (such as DAI for USD
or Facebook’s multi-denomination Libra) to
circulate in parallel with their official digi-
tal currencies; and (iii) what the relationship
between the central bank digital currencies
and independent cryptocurrencies such as
Bitcoin might be. The Chinese version may
or may not turn out to provide a model fol-
lowed elsewhere, but for the record, on these
three key features: (i) it is a hybrid; (ii) private
stablecoins are outlawed; and (iii) the extent
of its interaction with the full range of cryp-
tocurrencies is not yet clear, and may well
evolve over time.
And, it is the third issue that is most
important for the future value of Bitcoin and
other cryptocurrencies. There is a possibility
that central banks might try to create some
21GILES KEATING
Summary
The Covid crisis has turned is clearly drawing in many
out to be a perfect storm new investors. Alongside
for cryptocurrencies. The this, the potential for growth
threat of future inflation in real-economy transac
from the explosion in gov tions, initiated by providers
ernment debt remains far such as Worldline and given
beyond the visible horizon, prominence by the PayPal
yet it has clearly risen as move, could be given enor
budget deficits have soared mous impetus if the current
and monetary policy has moves towards central
been eased, and this pro bank digital currencies allow
vides an anchor justification interaction with existing
for an increasing pool of cryptocurrencies, whose
investors to hold cryptocur operation of digital banking
rencies, but especially Bit and real economy supply
coin due to its tightly limited chains would make them
future issuance. More imm the heart of the world’s new
ediately, the intensified digital workshop.
monetary easing that has
spread the “zero rates”
mantra out across the credit
and yield curves has coin
cided with the arrival of
income-earning possibili
ties from staking, fees,
loans and DeFi, especially
on the new small-cap cryp
tocurrencies and the up-
coming Ethereum 2, and
the potential for high single
or low double-digit earnings
22GILES KEATING
23 23FATEMEH SHIRAZI
Interoperability
Where are we now
and what can
we expect for 2021?
Author: Fatemeh Shirazi
In this article, we investigate interoperability in the context
of blockchain technologies. After a short definition of
interoperability, we review why interoperability is relevant
for the blockchain ecosystem and which benefits we
can expect from getting to a state where numerous sover
eign blockchains can seamlessly interact with each other.
We summarize existing technologies and then illustrate
what developments to expect from 2021. We conclude the
article with open challenges and some questions regard
ing interoperability between the decentralized and
centralized worlds.
24FATEMEH SHIRAZI
Definition and Problem Statement those properties, Ethereum first launched in 2015 and
A blockchain’s consensus decides the canonical history introduced smart contracts that allowed high flexibil-
of which transactions happened and ensures that these ity for a rich range of applications. However, Ethereum
transactions are valid. However this transaction history cannot solve the scalability problem and the costs of
is only directly visible to its own ecosystem. Interoper- running applications are getting higher the more it
ability between two blockchains refers to one or both grows. For example, for a simple transaction, the fee
chains being able to understand the history of the other is about $0.371 , and to fill a whole block, it would be
chain. This can be used for token transfers for exam- $140.448 and fees were much higher during the recent
ple, where token holders of a chain can exchange their DeFi bubble² . While Ethereum has plans to upgrade its
token for a token of another chain. protocol towards Eth2 to solve its scalability problem,
In the fiat world when an exchange between two there is no near future hope for reaching that goal. This
currencies happens, the correctness of the foreign example shows that there are fundamental trade-offs
currency is either checked physically when bills are between important properties and blockchains that
exchanged or confirmed by financial institutions with excel in a few distinct features.
a reputation and insurance schemes. In the blockchain If a user wants to benefit from different platforms
world, particularly in the context where a transaction is today, they are required to hold all involved tokens and
only finalized within an hour or ten minutes, how can swap between them. This means a user must go through
the recipient of an exchange know that they have not centralized (or decentralized) third-party exchanges,
been defrauded without trusting some third party? which may incur significant costs in terms of time,
trust, inconvenience and barriers to entry. Additionally,
Setting the stage: the process is tedious and complicated and reduces
Why do we need Interoperability? usability significantly. True interoperability between
During many millennia of human history, we have lived chains would make this obsolete and work in the back-
in a multi-currency world, where the money is issued ground and thereby reduce friction. Interoperability
by several nations (or unions of nations). As this is will make connected blockchains effectively one eco-
true for the centralized world, we can observe a simi- system, reducing the costs of lock-in when deciding
lar phenomenon in the emerging, decentralized world; which chain to use. True interoperability would allow
thousands of blockchain projects have launched and assets on one chain to derive value from being used on
operate using their native tokens. another and applications on different chains to interact.
However, the reason for having multiple currencies Another important reason why interoperability is
is different and contrasts in important factors: While required is the fact that some business ideas require
most centralized currencies are issued and sustained as communication between multiple protocols. For exam-
a pillar of power and influence, decentralized curren- ple, let us assume that a travel agency wants to book a
cies are optimized to serve the individual blockchain’s trip for a customer. This travel agent needs to book a
purpose. Additionally, most decentralized currencies flight, some insurance, accommodation, and maybe a
differ from their centralized predecessors in other car rental. However, getting good deals and availabil-
important properties: They are designed to make par- ity is not always trivial. The ideal case is that either
ticipation fairer and more inclusive and reduce the dif- all these items get booked definitely together or none
ferences of issuance across countries, e.g., by excluding does. If all these items need to be booked from differ-
central banks. Those desired properties are held in ent chains that are not interoperable, the delay could
check by their decentralized and borderless nature and jeopardize the booking. In the analog world, delays in
the fact that users can freely choose which digital cur- settlements are fixed with insurance. In the decentral-
rencies they prefer. ized world, while the flight might be finalized, it would
A world with multiple digital currencies is inevita- be unclear whether the hotel can be finalized too. True
ble because many different tokens serve a distinct pur- interoperability can bridge those individual applica-
pose and are specialized for various services. A famous tions and leverage the distinct benefits of them all.
example is Bitcoin, which is the first successful block- To summarize, interoperability is required to
chain application that is designed to be a decentralized reduce friction in changing between the different
currency or store of value. While it provides consider- tokens/currencies, which leads to wide-spread adop-
able security and stability, important properties of a tion and innovative business ideas: Cross-chain ora-
currency, it lacks scalability and flexibility. To include cles, Payment versus payment or delivery, Portable
25FATEMEH SHIRAZI
assets, Asset encumbrance, and Cross-chain contracts37. For more details see38 for a systemization of knowl-
Interoperability between chains is also useful for achiev- edge on communication across distributed ledgers.
ing reliable communication across chains. By creating
services to make collaboration between different chains Bridges: Current progress and what we can
easy, decentralized currencies can compete with and expect for 2021
surpass fiat currencies. Bridge protocols combine a number of technologies
such as 2-way pegs, relays, and efficient chain valida-
Interoperability Solutions for Token Transfer tion to realize token transfer between two chains. Two
Between Chains prominent bridge solutions are XClaim39 and tBTC that
There have been multiple solutions introduced for real- were both designed for bridging Ethereum to Bitcoin.
izing interoperability, in particular token transfer as XClaim is a protocol designed to create wrapped
follows. Bitcoin tokens on Ethereum. Another Ethereum/
Exchanges allow trading a token from one chain Bitcoin bridge is the tBTC project, which is a Bit-
with tokens from another chain. They either could be coin-backed ERC20 token that is built by Summa.
realized using a) notary schemes or b) atomic swaps. In Currently, the Polkadot and Cosmos projects are
notary schemes, one or a number of parties carry out an also focusing on bridging to Ethereum and Bitcoin.
action on chain, often using multisignature schemes. Some of the in-development bridge projects are the Pol-
The advantage of notary schemes is their efficiency, kadot/BTC bridge built by Interlay, which is a wrapped
while their disadvantage is that they are centralised and token bridge between BTC and Polkadot using 2-way
have not always optimally secure incentive schemes. pegs, relays, and a voting mechanism if attacks40/41
Atomic swaps are schemes such that the token transfer occur on the Bitcoin side.
happens either on both chains or on none. Setting up Another project is an Ethereum/Polkadot bridge
operations on both sides that are triggered by the same project built by Snowfork that uses a 2-way peg, but
secret, where only revealing it on one chain allows it to instead of having only a 1-way relay like Interlay,
happen on one side and by this other party. The advan- Snowfork’s solution realizes a 2-way relay where each
tage of atomic swaps is that there is no cost and there is side can follow the progress of the other chain.
no need to trust the other party. However, atomic swaps Moreover, a unidirectional Cosmos/Ethereum
are unfair because one party has an advantage of delay- bridge that is a 2-way peg and a 1-way relay is in imple-
ing the swap until the price is suitable and they are not mentation42 by Swishlabs which allows Ethereum
user friendly for some reasons, one being that they are ERC20 assets to be wrapped for Cosmos zones.
interactive and if one party fails to carry out their part In 2021 these projects will all launch. Bitcoin
of the protocol in a given time they might lose their bridges will allow Bitcon to be used as a store of value
tokens without receiving anything. on other chains, and bridging to Ethereum would allow
An alternative approach for interoperability are us to take advantage of the interesting network of proj-
asset migration protocols such as 1-way and 2-way ects while avoiding the expensive gas costs.
pegs where the tokens are burnt (1-way peg) or locked One of the main challenges for cross chain commu-
(2-way peg) on one chain and an amount of value in nication is choosing the best trust model at each phase of
tokens is issued on another chain. Two-way pegs are the protocol, which needs to be composed based on the
often referred to as wrapped tokens. These solutions use case and trust assumptions of the bridged chains.2
can be combined with “relays”, which are side chains Moreover, there are also open problems that will need
that follow the finality of a chain. One example of a to be solved or solutions that need to be improved on
relay is the BTC Relay project (http://btcrelay.org), in 2021 to make such bridge solutions secure. Many of
which is an Ethereum smart contract that follows the the bridge technologies use price oracles and rely on
progress of Bitcoin by storing Bitcoin block headers. accurate information from these price oracles. Another
Relays can be 1-way or 2-way depending on whether challenge will be dealing with price fluctuations, while
they follow only one side or both sides. The advantage some solutions for dealing with price fluctuations have
of 2-way peg solutions is that they are more usable, been suggested in the literature, in many cases the
however, price fluctuation between tokens pose a seri- bridge projects are unable to deal with big changes and
ous risk. In the fiat world, insurance helps with disas- would be insecure in such events. Another important
trous price fluctuations in the context of exchanges. challenge would be attacks such as 51% attacks, double
spend attacks on the chains, and incentive schemes that
26FATEMEH SHIRAZI
ensure bridge operators are incentivized to follow the prominent stablecoins backed by the US Dollar are
bridge protocols. Tether and Libra.
One of the interesting questions for 2021 is whether
Questions and Opportunities on Interoperabil- these stablecoins will be integrated into blockchain
ity Progress in 2021 projects such as Polkadot, Cosmos, and Eth2? This
Economics is an important part of the security in many would loosely connect the decentralized world to the
blockchain technologies, in particular ones relying centralised world.
on correct incentive schemes that reward correct exe- Furthermore, many countries are investigat-
cution of the protocol and punish malpractice. While ing Central Bank Digital Currencies (CBDCs) which
there has been some interesting work done on inves- are digital forms of fiat currencies. These currencies
tigating crypto economics in the past43/44/45/46/47 there would be centrally controlled and hence do not need to
hasnt been enough in-depth work published given the be implemented or realized using blockchain technol-
importance of understanding the economics of block- ogies. China for example is investigating using CBDCs
chains. This is in part because the technical complexity and has started its testing phase in four major cities48.
of many blockchain projects are not trivial to translate In the European Union the Digital Euro49 is also being
to concepts well known to the economic world. It is tested. It remains to be seen in 2021 whether CBDCs
not clear whether generally accepted economics rules will be implemented using blockchain technologies and
hold for the small blockchain ecosystems. However, whether they will be interoperable with decentralized
with the increase in technical education, hopefully we systems. If CBDCs end up being realized by distributed
all can look forward to more work being done in this ledger or blockchain technologies, they will be using
field in 2021. What is even more interesting is analys- centralized or permissioned means for controlling the
ing crypto-economics when blockchains are bridged state of the blockchain such as proof-of-authority solu-
together. How would these - until now isolated - econ- tions. Aside from the regulatory challenges, some of
omies impact each other? the technical challenges for public and permissionless
Something further to look forward to are smart blockchains to bridge to such chains could be not hav-
contracts that provide insurance. It is still a huge gap ing smart contract capabilities such as Bitcoin. Other
in the blockchain space. In the financial world, many financial instruments that could become interoperable
of the security risks of transactions and collabora- with decentralized tokens are SWIFT and SEPA.
tions are covered by insurance providing security for If the answer to some of these questions is indeed
personal and business losses. Such insurance facili- positive, that could be a huge game changer for the
tates collaboration by allowing more efficiency due to decentralised world in terms of widespread adoption.
reduced risk. After the DeFi boom in 2020 and other In the last couple of years a lot of exciting work has
unforeseen events occurring in 2020 that impacted the been proposed and developed on interoperability. 2021
world’s economy significantly. Next year seems to be a will be the year when all of these efforts will come to
good time to come together by strengthening collabo- fruition and hopefully even more will be achieved to
rations and to build solutions that provide more stabil- create a diverse and strong decentralized web that we
ity and security for the blockchain world and especially are looking forward to.
for interoperability solutions.
Another interesting area to look forward to is
development of interoperability between the decen-
tralised and the centralised worlds. Currently, one of
the means of connecting these two are stablecoins.
Blockchain tokens have high fluctuations, partly due
to their small market cap. Stable coins were designed
to counter this volatility. Reducing the volatility can be
either algorithmic where the market cap is increased or
reduced depending on the token rise or fall in value, or
the reduction in volatility can be achieved by tying the
stablecoin token to a valued item that has less volatil-
ity. In the latter case, the tokens are backed by items
such as fiat currency, gold, or even land. Examples of
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