At the onset of the year, we (Arca) released our annual digital assets predictions, which focused on a few themes we believed would ultimately drive the majority of digital asset investment gains in 2020. We obviously did not anticipate COVID-19, a 35% jump in the M1 money supply or the accompanying acceleration of an already ongoing shift from a physical world to a digital world, but our predictions proved fairly accurate nonetheless.  

With 2020 concluding, it’s time to look back at how these predictions fared, and touch on a few important drivers of returns in 2020 that we did not foresee. The shift to digital is only getting started, and it is therefore highly unlikely that anything will change once the world re-opens.

Thematic investing has unequivocally driven returns in 2020, and three of the four themes we identified have proven accurate. The outlier was the staking theme, which was not a large driver of year-to-date returns. In fact, most of the tokens that operate under “proof of stake” consensus have underperformed the market this year. 

However, the reason for this underperformance can largely be attributed to the success of our other three identified themes. The growth of decentralized or open finance (DeFi) and the newfound focus on structuring tokens with real value accrual mechanisms and yields, driven primarily by user rewards, has made staking for yield somewhat obsolete from an attractive investment standpoint. 

See also: Jeff Dorman – Digital Assets Are More Recession-Proof Than You Might Think

Let’s start with DeFi.  This sector of the market has been hands down the runaway leader in digital assets, from both a growth perspective and a returns perspective. Our prediction was quite simple:

Digging deeper, decentralized trading exchanges (DEXs) have been one of the most impressive sub-sectors, posting all-time record high volumes, but we’ve also seen strength and growth coming from asset management protocols, synthetic assets, lending/borrowing platforms, and insurance. A basket of diversified DeFi tokens across insurance (NXM), asset management (YFI, MLN), DEXs (KNC, RUNE, SUSHI, UNI), lending/borrowing (AAVE), and derivatives (SNX) created the strongest subset of returns across any other sector of digital assets.  

Moreover, the strong DeFi returns did not stem purely from platform growth. Much of it can be attributed to our other prediction, “structured tokens and enhanced tokenomics.” The flexibility of token structures has allowed token issuers to change the rules and enhance the features that come with owning a token and participating in the network. While this can be scary from a legal standpoint since you don’t always know exactly what you are getting at the time of investment, it’s also invigorating from an investing standpoint because it allows good teams who issue tokens to continue to tweak the value accrual model until they get it right.  

And boy are they ever. From Compound (COMP) and the liquidity mining revolution, to Synthetix (SNX) and its velocity sink, to Uniswap (UNI) and its fair decentralized launch, to revamped incentive structures rewarding governance at Kyber (KNC) and Aave (AAVE) ... Token issuers are scrambling to introduce new models that enhance the value for both users and investors. We applaud this evolution.

We had no idea sports would be shut down in 2020, but I’m not sure it would have changed the outcome. Our thesis regarding the “digitization of the fan experience” was taking form with or without the ensuing lockdown. The in-game experience was already dying at the hands of interactive, at-home engaged fan experiences, and COVID-19 was simply the nail in the coffin.

We went into great detail discussing “Fan Engagement Tokens” (FTOs) from Socios (CHZ) earlier this year, and the successful issuance of digital assets tied to voting rights and decisions affecting major sports clubs. We’re also seeing a rise in digital baseball cards and digital collectibles as well as tokens backed by the salaries of athletes.

See also: The Inevitable Marriage of Yield Farming and NFTs, Explained

Additionally, the “digitization of the fan experience” is extending beyond sports into other areas like music and entertainment. While there are not a lot of pure play ways to express this theme yet today, we continue to expect more opportunities to come in the near future.

Let’s check in one-by-one to see how we did:

More mergers between pick & shovel companies, often at distressed levels.  
From Coinbase assuming Tagomi, to Binance going on a spending spree, to Voyageur acquiring LGO, M&A is in full force as the leading service providers take advantage of the oversaturation of smaller platforms that never achieved solo success.  Several of these transactions were more takeunders than takeovers given the lack of progress or success of the acquirees. We did not anticipate the recent wave of DeFi “fake-quisitions,” but are encouraged by the idea of combining user bases and developers to build DeFi conglomerates.

The Bitcoin halving, while telegraphed and understood, will still be a huge driver of digital asset growth.
While the halving itself, as expected, did basically nothing for bitcoin’s price in real time, the consistent monetary policy and limited fixed supply has attracted new players. Once that happened, we have been witnessing a supply shortage. From Paul Tudor Jones to Jim Simons, and more recently MicroStrategy, Square, Stan Drukenmiller and more, the cavalry is clearly coming and they are fighting over a small pie.

Existing non-crypto native companies will utilize tokens.
While this is being held back by a lack of regulatory clarity and a lack of investment bankers, it’s happening, slowly. For example, both Reddit and Atari issued tokens. While these are just small examples, the world is beginning to recognize that tokens can be utilized in a company’s capital structure as complements to debt and equity.  

We expect more of this in 2021 and beyond, as every company with a subscription model (Netflix, ESPN, gym memberships) or a consumer customer model (restaurants, airlines, internet shopping) will recognize that tokens are the greatest capital formation and customer bootstrapping incentive mechanism we’ve ever seen. 

We’ll be out soon with our 2021 predictions, many of which stem from budding 2020 events that we either did not foresee or grew faster than anticipated. A few things we have our eye on:

After a whirlwind 2020, we look forward to seeing what 2021 holds.