As the industry matures, the number of crypto applications that can attract investors is starting to decline, but this could be a positive in pointing to long-term winners in the space, says crypto services firm NYDIG.
Greg Cipolaro, head of research at NYDIG, said in a note Friday that the “investable world” of cryptocurrencies is narrowing to applications and services that “extend traditional financial products onto blockchain infrastructure.”
He specifically cited Bitcoin (BTC), tokenized assets, stablecoins, some decentralized financial infrastructure, and a limited number of “general purpose” blockchains like Ethereum, adding that beyond such use cases “the likelihood of large-scale blockchain applications appears to be lower than previously assumed.”
While some crypto executives championed blockchain as an alternative for nearly every service, many of the once-hyped use cases for crypto, such as gaming, social networking, and the Metaverse, have faded compared to centralized competitors.
Cipolaro argued that this is because centralized systems are “always faster, cheaper, and more operationally efficient for the vast majority of enterprise and consumer applications.”
Economically viable apps will be leaner than expected
“The space for economically viable blockchain applications is narrower than early narratives had hoped,” Cipolaro said, arguing that only use cases in which the benefits of blockchain outweigh its costs will survive.
“The core properties of open blockchains: trustlessness, permissionlessness, and censorship resistance make them uniquely suited for monetary and monetary-like (financial) applications,” he added. “Most real-world applications do not require a global, permissionless state machine with an immutable ledger.”
Cipolaro said the current market reflects this, as Bitcoin has become more dominant as stakes in altcoins have largely disappeared due to “limited emergence of durable new narratives.”
He added: “The failure of many non-financial industries to gain traction suggests that capital is being consolidated towards smaller use cases.” “Rather than an explosion of applications, we are seeing a concentration of capital in a few core categories.”
Related: The virtual currency market cannot survive without more trust.
Cipolaro said this narrowing of use cases could “improve durability and clarity around long-term winners” for some projects, particularly those related to Bitcoin and financial infrastructure.
However, he added that the “speculative breadth” of the crypto market could also be reduced, squeezing funds that would normally flow into alternative assets.
“A cooler market, rooted in finance and financial utility rather than broad ‘Web 3’ ambitions, could ultimately strengthen core assets,” Cipolaro said. “But it also implies that the total crypto footprint may be significantly smaller than previously predicted.”
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