Excerpt from ARK Investment Annual Report: The Next Decade of Bitcoin, Ethereum, and Web3

Author: ARK Investment

Compiled by: Hailsman, Chain Catcher

Led by Cathie Wood, ARK Investment released "ARK's Big Ideas 2022" today, discussing the current state and future trends of Bitcoin, DeFi, and Web3 over the next decade. Chain Catcher has translated and organized these three sections.

1. Bitcoin: The Currency Revolution

Author: ARK Analyst Yassine Elmandjra

As Bitcoin's market capitalization reached an all-time high in 2021, ARK's research indicates that its network fundamentals remain healthy. Bitcoin's market cap still represents a small portion of global assets, and its scale may expand as nations adopt it as legal tender. We estimate that by 2030, the price of one Bitcoin could exceed $1 million.

1. Bitcoin's total market cap reached $1 trillion in 2021

2. Bitcoin market participants are maturing and focusing on long-term growth

Despite the increase in Bitcoin's price to record highs, on-chain data suggests that Bitcoin holders are focused on long-term growth potential.

3. Bitcoin is capturing market share as a global settlement network

In 2021, Bitcoin's cumulative transfer volume grew by 463%. Bitcoin's annual settlement volume has surpassed that of Visa.

4. Bitcoin may continue to scale to address technological breakthroughs

Last year, Bitcoin underwent conservative strategic enhancements at its base layer while encouraging "off-chain" experimentation.

5. Bitcoin is attracting institutional holders

With the launch of more regulated products and adoption by corporations and nations, the base of institutional holders of Bitcoin appears to be expanding.

6. El Salvador is the first nation to adopt Bitcoin as legal tender

• In September of this year, El Salvador became the first country to adopt Bitcoin as legal tender.
• As of December 31, 2021, El Salvador had purchased 1,391 BTC.
• Approximately 3.8 million people are using El Salvador's digital wallet Chivo, indicating that BTC covers 84% of the country's legal citizens.
• Chivo processes $2 million in remittances daily, accounting for 12% of El Salvador's $6 billion in remittances, with annual remittances exceeding 2% of its GDP.

7. Concerns about Bitcoin's "lack of sustainability" are unfounded

Our research indicates that Bitcoin may change the history of currency by providing financial freedom and empowerment in a fair, global, and distributed manner.

Environment: Bitcoin encourages new, more efficient energy production methods. Bitcoin mining will fully utilize natural gas that would otherwise be flared or vented. Bitcoin mining can incentivize investment in intermittent energy systems, increasing the share of renewable energy in the grid's energy supply.

Social: Bitcoin provides a property rights system that does not rely on nation-states, protecting the purchasing power of people in countries with strict capital controls, high currency inflation, or unstable governments. Bitcoin is open to anyone, as it does not depend on a central authority to determine participant eligibility.

Governance: Bitcoin is open, transparent, auditable, and predictable. Bitcoin lacks a central point of failure, reducing potential human biases and errors. Bitcoin includes a unique system of checks and balances designed to encourage protocol innovation and maintenance, ensuring that any changes align with stakeholder interests.

8. Bitcoin mining has developed into a multi-billion dollar industry

In times of geopolitical uncertainty and financial market turmoil, converting energy into monetary assets may be crucial.

Digital Currency Energy Network

• Bitcoin's innovative potential lies in its ability to facilitate value transfer without relying on centralization. The key enabling factor is proof of work.
• Bitcoin incentivizes the discovery of economically efficient energy, unaffected by geographical location and consumer demand. As China cracks down on mining, the U.S. has become the leading country for Bitcoin mining, accounting for over 35% of the total hash rate as of November 2021.
• Countries like El Salvador are heavily investing in Bitcoin mining infrastructure. In October 2021, El Salvador announced plans to mine Bitcoin using volcanic energy, following the announcement of its state-owned geothermal power company LaGeo's plans to engage in Bitcoin mining.

9. Bitcoin mining could fundamentally change the energy production structure

According to our research, Bitcoin mining will encourage renewable, carbon-free energy generation and produce more electricity.

• As energy buyers, Bitcoin miners can incentivize new, more efficient energy production methods.
• According to ARK's research, if Bitcoin mining impacts the utility grid, intermittent energy sources like wind and solar can meet a larger proportion of grid demand.
• Energy asset owners may become Bitcoin miners.
• Adding Bitcoin mining to the toolbox of power developers should increase the overall addressable market for renewable and intermittent energy. In the lower left corner of the chart, without Bitcoin mining, renewable energy could only meet 40% of grid demand. In the upper right corner of the chart, with the introduction of Bitcoin mining, solar and batteries could meet 99% of grid demand.

10. Currently, Bitcoin represents only a small portion of global asset value, with significant appreciation potential

According to our research, Bitcoin's market cap could expand more than 25 times over the next decade, with a single coin exceeding $1 million.

11. By 2030, the price of one Bitcoin could exceed $1 million

2. Ethereum and DeFi: The Financial Revolution

Authors: ARK Analyst Frank Downing, ARK Research Assistant Nishita Jain

1. Smart contracts are marginally taking over traditional financial functions

Smart contract platforms like Ethereum are open and transparent. They do not rely on traditional financial intermediaries, thus reducing counterparty risk.

2. Ethereum reaches new highs driven by DeFi and NFTs

The construction of DeFi, stablecoins, and NFTs on Ethereum has propelled it to unprecedented new highs by the end of 2021. Since the speculative ICOs of 2018 were washed out, Ethereum's activity has seen significant growth.

3. Increased network activity has driven Ethereum's transaction fees above Bitcoin's

Higher fees have created demand for L2 scaling solutions to reduce Ethereum's transaction costs while maintaining security.

4. Crypto finance may scale more effectively than traditional finance

Financial transactions based on smart contracts can settle almost anywhere in the world in near real-time. Compared to traditional finance (TradFi), the income per employee illustrates the efficiency of DeFi.

5. DAOs implement a new form of coordination and governance

Crucial to the governance of DeFi, DAOs are replacing centralized, hierarchical corporate structures with decentralized communities.

For example, Uniswap DAO:

• The UNI token was launched in September 2020.
• 60% of the genesis supply was allocated to early community members.
• The market cap of the UNI token is approximately $7.8 billion.
• There are about 296,000 unique addresses holding UNI tokens.

6. Stablecoins drive crypto trading, lending, and payments

Stablecoins are crypto assets pegged to fiat currencies, with the U.S. dollar often serving as a stable value asset for crypto trading, lending, and payments in both centralized and decentralized markets. They increased nearly fivefold in 2021.

In international crypto exchanges like Binance, where access to U.S. bank accounts is restricted, stablecoin-denominated trading pairs account for over 70% of total trading volume on centralized exchanges, far exceeding dollar-denominated trading pairs, which only account for 15%. Stablecoins are widely used in DeFi, representing 95% of total outstanding debt in the portfolio and 22% of total liquidity on Uniswap.

7. Regulators are prioritizing crypto innovation, especially DeFi

8. Progress on Ethereum's work

9. Ethereum's market cap could exceed $20 trillion in the next 10 years

According to our research, Ethereum could replace many traditional financial services, and its native token ETH could compete as a global currency. As financial services develop in chains, decentralized networks are likely to capture market share from existing financial intermediaries. Beneficiaries of this shift include Ethereum, foundational protocols, and DeFi, such as Dapps built on Ethereum. As the preferred collateral for DeFi and the unit of account for the NFT market, Ether (ETH) has the potential to capture a portion of the global $123 trillion M2.

3. Web3: The Internet Revolution

Authors: ARK Analysts Nicholas Grous, Frank Downing, ARK Analyst Intern Andrew Kim

As consumers spend more time and resources in the virtual world, the importance of digital assets may increase significantly. A new global framework like NFTs provides a stable way to take ownership and control of digital assets away from companies, benefiting individuals.

By 2030, we expect Web3 to reduce annual offline consumption by $7.3 trillion and directly promote online consumption growth of 28% per year, increasing from $1.4 trillion to $12.5 trillion annually.

1. Digital ownership can accelerate the transition of human activity from the physical world to the digital world

We believe that if online participants can truly own digital assets (not just use or rent them), the Web3 virtual ecosystem will thrive.

In traditional Web 2.0 business models, users often face various restrictions on products or services when they exit. For example, they cannot transfer in-game assets from one game to another, and they face the risk of censorship from social media platforms profiting from their content. In contrast, public and decentralized blockchains allow users to store and trade assets on a legitimate secondary market.

2. Open blockchains facilitate the verification of digital asset ownership

NFTs, as smart contracts, are used to verify ownership of digital assets on public blockchains, and they have the power to reclaim the rights to store, control, and verify assets from centralized platforms. In 2021, NFTs generated $21 billion in sales, with the number of individual buyers skyrocketing nearly 8 times to over 700,000.

3. So far, Ethereum has been the preferred platform for deploying smart contracts

Based on public data, Ethereum is the dominant smart contract platform and the preferred blockchain for issuing, selling, and trading NFTs. However, as Ethereum's fees continue to rise, competition from other layer one blockchains and layer two scaling technologies is intensifying, with new technologies constantly emerging.

4. NFTs may shift from static collectibles to dynamic digital assets

Currently, collectibles and digital art account for over 75% of Ethereum's NFT sales. Transactions of NFTs in virtual worlds like The Sandbox and games like Axie Infinity account for about 25% of Ethereum's total sales. Based on the development of the video game market, the demand for blockchain-based games and virtual worlds may exceed that for digital collectibles and art, especially in the next five to ten years, as collectibles and artworks begin to see more use cases in various games.

5. Dynamic NFTs create a new, active form of entertainment

The increasing interoperability of NFTs can facilitate the fusion of collecting, gaming, socializing, and investing.

6. We believe NFTs will blur the lines between consumption and investment

NFTs provide a liquid market where consumers can invest in different digital assets and engage in peer-to-peer trading. The market clearing price on the blockchain is determined by buyers and sellers of NFTs, rather than data aggregation platforms, creating new forms of asset monetization.

7. Blockchain-based games can achieve both entertainment and monetization

Paid games require end users to purchase games at a fixed cost.

Free-to-play games are replacing paid games and unlocking a larger user base. Virtual goods and games as a service are increasing revenue growth for game developers.

Because NFTs recognize ownership of in-game assets, they enable a play-to-earn model. Games can raise funds and reward users through NFT sales and in-game rewards.

8. NFT projects can maximize returns for individual buyers and sellers

Compared to centralized platforms like Amazon, NFT aggregation platforms like OpenSea charge only a small fraction of transaction fees. Of course, as demand for blockchain-based assets grows, gas fees are also rising, which needs to be measured. However, various scaling solutions are currently being developed to help reduce the cost of using blockchains.

9. If Web3 continues to grow, the monetization rate of online consumption will approach that of offline consumption by 2030

Our research indicates that over the next decade, with Web3, the monetization of online consumption time will grow at a compound annual growth rate of 19%, while without Web3, it will only grow by 8%.

10. Due to Web3, annual online consumption could reach $12.5 trillion in the next decade

According to ARK's research, offline consumption will peak at $49 trillion annually in the mid-decade, then decline with the emergence of Web3. Without Web3, online consumption is likely to grow at a rate of 16% per year, increasing from $1.4 trillion in 2021 to $5.2 trillion by 2030. With Web3, annual online spending could grow at a rate of 28% to $12.5 trillion.