How will cryptocurrencies evolve in the next 5 years?

Once you see the world as it could be, it is impossible to be satisfied with the reality of the world as it is.

Written by: 0XSMAC & COMPOUND CRYPTO

Compile: Block unicorn

At Compound Crypto, we believe in building various visions of the future that we believe in across all of our core areas of focus. We do this over long time horizons and over multiple cycles because the best way to learn things is to study them as they start to break down.

Come 2023, cryptocurrencies are in some ways doing exactly that. In the face of an uncertain future, with inevitable tailwinds and powerful headwinds, we've been trying internally to think through the subtleties of progress in categories we care deeply about. This leads to a lively quest to understand how our world evolves in detail year after year, and how cryptocurrencies as an industry and technology play their part in this evolution.

2023-2024 seeks mass adoption

DeFi is back, but not in the way many expected. Our total DeFi users quietly topped 30M, but this pace of adoption has been sweet and bitter for some; activity on licensed KYC products has skyrocketed. Public opinion has been mixed, with some delighted to see wider participation and a continued influx of traditional institutions into the space, increasing the value of their investments. While others claim that white-glove financial services offerings, especially for high-net-worth individuals, are now available through forward-looking traditional financial institutions, are undermining the very nature of cryptocurrencies.

Native permissionless DeFi usage returns to a lesser extent. A large amount of US Treasuries is already on-chain, both through synthetic offshore operators and more regulated but slower moving offshore operators. While stablecoin trading volume topped $500B, a new metric focused on sizing cryptocurrencies is stablecoin + treasury bonds, which peaked at over $1 trillion during this period.

While on-chain options markets have grown in maturity due to increased institutional liquidity, they are not yet fully in place. Now, the development path seems to be feasible. As expected, this manifests itself through exchanges offering perpetual contracts and options, allowing for cross-chain margining and a dynamic risk engine. The most exciting new primitive is a mobile application wallet, the account abstraction wallet lowers the entry threshold for new users, and provides multi-chain, multi-asset revenue generation. Plenty of other companies claim to do this, but the user interface and product details are what make it stand out.

Gaming isn’t the killer use case to lure newcomers into the space, and the hundreds of millions of dollars invested in crypto gaming will yield little return by the end of 2024. Game trailers continued to be released, but none of the crypto-native games saw any meaningful sustained attention. Crypto games are starting to take on the zk tech memes of the 2017-2020 period ("don't worry, this is the year, it's coming"). However, the performance of blockchains is still insufficient for fully on-chain, continuous state-changing games, and the development cycle of building an engaging off-chain game with on-chain assets is taking longer than expected.

The unlocking of "user adoption" comes from more intelligent, user-friendly, guided search, which makes it easier for ordinary people to explore on-chain games, which there are many revisionist historical views that think this is obvious.

** There are advanced on-chain search assistants in the wallet, which can seamlessly integrate on-chain data and interact with the wallet. **Example searches: "Show me the most popular NFTs of the last month", "Buy me $100 of ETH in the next 2 hours". These are just some of the queries anyone can make from an increasingly slick interface that looks more like a Runway product than a Notion form. From an application integration standpoint, we're not quite there yet, but it's clear that's where we're headed.

More advanced user actions will soon include things like "Show me the list of stablecoin farm yields that launched last month with 10-20% APR. Over the next 2 weeks, convert my existing 10% % of stablecoin risk is evenly transferred to these stablecoins”. The actual level of user adoption is overstated, but mostly because there aren't many new, non-financial things that can be done on-chain.

“Solana positions itself as a leader in mobile-focused development, making it easier for developers to develop applications in the blockchain and mobile space.”

While the game continues to disappoint, the lone bright spot is Solana, which is seen as a chain of games on desktop and, increasingly, mobile. Its lead in building mobile experiences paid off, as the web saw a slew of mobile Solana titles launching on Saga. Sales of Saga (Solana's mobile phone brand) were modest (50K-100K units sold), but Solana established itself as the leading mobile-focused non-native developer.

Polygon lags behind here because it lacks Solana's game throughput performance, and composability isn't too important in the early days of these limited games. Polygon has made good use of its own strengths. As the best at cooperating with Web2 brands, and allowing Web companies to join Polygon to develop the cryptocurrency layer, it has further consolidated its de facto position as a retail "loyalty program" cooperation channel.

In the cryptocurrency space, some social applications are temporarily attractive, but the depth of differentiation and enabling new behaviors is mostly quite shallow. Although by the end of 2024, there is a sense that this vertical finally has enough talented crypto product talent to build new applications that ordinary users will actually use. Electric Capital's 2024 Developer Report will reveal that we have crossed the 75,000 monthly active developer mark, and 25,000 full-time developers.

As always, when the bull market pushes ahead and animal spirits take hold, privacy concerns are put on the back burner. For this reason, the development of zkEVMs appears to be slow, although there are some new signs of development in very specific use cases for the privacy technology (most notably health data and location data). But in general, people haven't cared about privacy.

Hong Kong moved quickly and continues to attract the entire crypto industry. It sees an opportunity because the U.S. is in a presidential election year and doesn’t spend much time on regulation or regulation of cryptocurrencies. This has unfortunately led to cryptocurrency becoming a partisan issue in Washington, with Republicans calling for a looser regulatory framework while browbeating about the possibility of the U.S. losing out to China. Democrats, on the other hand, have strongly opposed the cryptocurrency stance, calling for more regulation, regulations, and restrictions on freedom. While pundits on cryptocurrency policy desperately try to avoid this partisan divide, both parties are simply pandering to their constituents.

Fears of a dystopian CBDC are lessened as the FedNow (Federal Reserve System) listing is less than impressive. Some banks are using it, but it's just an upgraded version of the SWIFT rail, with some limited superficial decentralization. For all intents and purposes, it's pretty much moot.

On the positive side, we did see bipartisan support for US custodial stablecoin regulations, with a bill very similar to the Toomey Act passed. At least from the perspective of the legislature, there is still no clarity on the default treatment of cryptocurrencies (commodities or securities). However, there are some judicial precedents that provide the industry with what it considers "strong enough" clarity that the industry does not feel it will be stifled. When a Republican (as a narrow loser) wins the presidential election, many crypto folks take too seriously what this means for regulatory perspectives and kick off a period of undeserved madness. Gary Gensler (Chairman of the SEC) has kept his job and troubled the cryptocurrency industry, although his influence is waning.

“Major protocols (Uniswap, Aave, Curve) that appear to be safe will fall victim to the largest hack in crypto history.”

As the space continues to expand, a negative effect is the proliferation of more and more sophisticated hacks. Seemingly secure major protocols (Uniswap, Aave, Curve) would fall victim to the largest hack in crypto history. This has raised red flags about security. As a narrative, security became a hot topic for investors, with much of the discussion surrounding the fact that we now have "real" non-native users. These people are not comfortable with the idea of routine fraud, bugs, or malicious contracts, unlike crypto-native users. "We need a more sophisticated security infrastructure!" - became a hot topic.

Crypto VCs have transformed into AI VCs, it’s true. A lot of LPs have their capital destroyed because they don't really understand crypto, just scratch the surface, and they don't know anything about artificial intelligence. Many investors who turned to crypto in 2022 will quietly return after the price improves, boasting that they want to "return to the closest community and the crypto space that I know deeply." It's annoying, but not surprising.

The inevitability of crypto has become clear to crypto users during the corona virus, many of whom harbor doubts about the space in their hearts in 2022, even though they won’t admit it now. By the end of 2024, the outside world is still quite skeptical about "what the hell was built?", but for those inside crypto, this straw man argument no longer carries weight, even as an objection.

2025 Ephemeral (ETH)

Now, the cryptocurrency hype cycle is in full swing. Gensler has become such an incompetent bird as the chairman of the US Securities and Exchange Commission (SEC), it is clear that he will not continue to hold the position after his term ends in 2026. While the U.S. Commodity Futures Trading Commission (CFTC) has not yet been officially recognized as the regulator of choice for cryptocurrencies, it is clear that this is a formality and the U.S. has managed to avoid what was previously seen as an existential crisis.

All major banks and brokerages now offer some form of cryptocurrency services. Much of this business takes place in the asset management departments of these institutions, but each sell-side trading desk now has a dedicated crypto asset team. The major banks have yet to engage in market making, but only because the regulatory environment has been slow to change, and these banks have gradually built and hired teams to prepare for this inevitability.

The four largest financial institutions in the United States now hold over $20 trillion in assets

Today, the question of whether blockchains should remain public is a more pressing bone of contention. Very sophisticated hackers continue to hold the lead, outpacing rapidly evolving security infrastructure, as the size of the field expands and the amounts involved in these attacks draw negative headlines. In fact, the on-chain environment is much more secure than it was just 2-3 years ago. Four largest financial institutions in the US, now holding more than $20 trillion in assets, use these opportunities to promote the development of private blockchains; Goldman Sachs' Marcus program a few years ago.

On-chain options markets are finally starting to develop, as current architectures are efficient enough to handle the complexity of pricing inputs. Crypto options are growing as a percentage of spot trading, but still only account for 50% (albeit up from 2% a few years ago). Unsurprisingly, the market for on-chain structured products is booming. While the 2010s saw the emergence and failure of numerous fintech lending platforms, much of the alternative lending activity has moved on-chain. Data is richer, payment processing is continuous, the diversity of businesses participating globally is of limited relevance, and there is now a robust on-chain physical market that regularly issues bonds against it as collateral.

An unintended consequence of this hype cycle has been concerns about the rate at which Ethereum is burning (now up to 15,000 ETH per day). A discussion about staker reward share adjustments has become very contentious, with one side trying to adjust the reward share to stakers, while the other argues that such a change is unnecessary. The current state (80% burn / 20% to depositors) is great for holders of ETH who point to very high demand for ETH, but will have long-term sustainability implications if nothing is done real concern.

Further complicating matters is traditional finance's fascination with Ethereum; stable ETH earnings have become an easy-to-understand meme for traditional finance. There is a lively debate on the idea of introducing a "min/max deposit yield". An important socially coordinated development is the emergence of better frameworks for evaluating protocols and valuing cryptoassets. There are now enough protocols (30+) generating meaningful fee revenue ($100M annualized) that no one is clamoring for Total Value Locked (TVL) anymore. Incentivizing initial liquidity is important, but the key metrics most people focus on are related to:

• Number of paying addresses
• Duplicate payment address
• Penetration rate of "power users"; this is an indicator developed by improved data visualization technology, which makes it easy to see which wallet addresses will pay in the future, specific to each stage
• Allows for integration; another new metric that measures the "trustworthiness" of protocols by measuring the degree to which users authorize each protocol to perform autonomous wallet operations.

Some of the more established protocols are now valued based on multiples of fee income or fee generation, but there is still debate as to whether liquidity is more relevant. Those multiples are still significantly higher than those of current growth tech companies, but the gap is narrowing as the largest protocols now generate nine-figure fees.

Crypto Protocols and Foundations Use Tokens to Acquire Traditional Tech Startups

Bitcoin (BTC) and Ethereum (ETH) exchange-traded funds (ETFs) have finally been approved, bringing further liquidity to the space and opening the door to wider retail participation. Crypto protocols and foundations use tokens to acquire traditional tech start-ups, and cross-mergers began to appear, which, although questionable at first, turned out to be quite successful: the crypto industry attracted a wave of high-quality talent, while the weak Startups get better results.

In developing countries, cryptocurrencies have gained a significant and sustained boost. Some developing regions in Latin America and Asia continue to experience incredible rates of adoption. In some of these countries, stablecoins now account for the majority of transaction volume. Digital assets became one of the five most widely held assets in Asia, behind stocks, cash, fixed income and real estate.

On the consumer side, early adopters of consumer augmented reality (AR) products have been derided for wearing clunky AR products in public, similar to early Google Glass or first-generation AirPods wearers. However, more and more people are starting to wear the next generation of these devices, which are smaller, more comfortable, can be worn for extended periods of time, and are now socially acceptable.

Crypto projects employ AR advertising as a means to launch new networks and cement influence among younger generations, who have disproportionate adoption rates for using these products. Users now interact with AR encrypted ads, complete mini-tasks/mini-games/surveys, and are rewarded with tokens for providing direct feedback on projects, a new behavior that inadvertently solves many of the ongoing problems of collusion attacks.

On-chain search helpers continue to improve, those previously limited to relatively simple actions (e.g. "over the next two weeks, split 10% of my existing stablecoin exposure evenly between these two lending protocols") is maturing. Through new session keys and smart contract account innovations, users can choose to provide varying degrees of proxy permissions to these search assistants. Even if the user is not online or using their wallet, if they allow the maximum degree of agency, the search assistant can decide to perform a specific operation, such as arbitrage of assets owned in a smart contract account, or choose to stake based on attractive yields assets. All without explicit user instructions. Some people will be comfortable offering this level of autonomy, but there are also costly mistakes that keep most people off.

Solana Labs continues its hardware efforts and doubles down on gaming

The V2 release of Saga (which is Solana's mobile phone brand) was significantly better than V1 (500,000 units sold), although its success led some other ecosystems to falsely believe that they could replicate this success. Solana Labs continued their hardware efforts and doubled down on gaming, announcing a virtual reality (VR) partnership to build Solana-enabled VR games on their own devices. The timing of that launch is unclear, but there's no doubting its ambitious vision.

Unsurprisingly, ample liquidity and higher prices have led to renewed speculative enthusiasm. This time it is manifested in the popularity of encrypted gambling and the proliferation of encrypted gambling platforms, especially in Asia, where most of the activities are concentrated, and the amount of money is huge overall. The annual revenue of the entire crypto gambling industry has now exceeded the annual revenue of traditional gaming companies such as MGM (increased by 5 times). Many of these projects were launched without much regard for licensing and regulatory ramifications - we've seen platforms shut down overnight when regulators crack down, especially in the US. Users suffered losses, and the comparison to Poker's Black Friday 2011 is apt.

Encryption-enabled tools and their privacy-preserving guarantees show real potential - first for rare disease data collection aggregation, which has led to some unexpected scientific breakthroughs

The first real-scale use case for zero-knowledge technology becomes clear, and not in the financial sector of lending/lending/institutional privacy, as many expected, but in the growing DeSci (data science) community middle. Health data protection and collection has become very important following the continued disclosure of sensitive health information. Encryption-enabled tools and their privacy-preserving guarantees show real potential—first for rare disease data collection aggregation, which has already led to some unexpected scientific breakthroughs. These surprising successes, and discussions of when the cost of sequencing the human genome will hit $1, have sparked interest in the technology among many in the scientific community.

Multimodal transformers (referring to a type of neural network model) have grown enormously in size (many now exceed 500 billion parameters) and train on images, video, audio, and motion. The computational workload is enormous. With multiple companies now spending more than $1 billion a year on training, the demand for chips is so huge that there have even been bills in Congress to limit their use. As a result, we see a significant increase in demand for underlying GPUs. Encrypted networks providing access to these resources are seeing exponential growth in adoption, with leading providers rendering over 100 million frames in 2025. It is now clear that there are many interesting application areas beyond financial speculation, many of which solve major problems that might otherwise be unsolvable.

Although not quite there yet, some small groups in the energy and crypto space are building independent infrastructure models, especially decentralized energy resources. Microgrids are gaining popularity in Texas, California, Florida and the Southwest.

2026 Important Turning Point

The year 2026 will be reviewed as a key inflection point in the crypto space. This year, we finally saw constructive encryption legislation passed in the US.

Here are the guiding principles:

1. Clarify regulation: The CFTC is recognized as the default regulatory agency for crypto assets, while the SEC is responsible for regulating a subset of crypto assets that are considered security tokens.

2. Clear tax treatment: Clear tax guidance is given for different types of encrypted assets; most encrypted assets are taxed as property, while stable coins and security tokens have independent tax laws.

3. Flexible Guiding Principles: Provide high-level principled guidance rather than specific regulations to accommodate the rapid development of the encryption field; this approach balances the need for regulatory oversight with the flexibility for continuous innovation.

4. Minimal compliance burden: Educating efforts on Capitol Hill over the past few years have brought greater awareness of the importance of avoiding unnecessary compliance burdens on crypto startups.

5. International cooperation is discussed and most agree that it is necessary, although there are issues of decentralization and regulatory arbitrage that will take some time to resolve.

** Montenegro's economic success has paved the way for some existing EU member states to seriously consider leaving the EU**

Outside of the US, we're seeing some interesting experiments taking shape. Montenegro has become a center of digital experimentation over the past few years and has introduced Ethereum (ETH) as legal tender. This is more symbolic, although formal adoption is the strongest signal yet that it may no longer be interested in joining the European Union. Montenegro's economic success has paved the way for some existing EU member states to seriously consider leaving the bloc.

We see the first attempt in Asia to introduce a massive controlled basic income (UBI) scheme

In Asia, we have further seen the first large-scale attempts to introduce a controlled basic income (UBI) scheme. The government has stepped up efforts to stimulate activity as Japan continues to face a demographic crisis and stagnant economic growth. It began implementing digital identities, issuing specific tokens to residents based on predetermined income, location and employment status. These tokens are time-limited and must be spent at registered participating merchants within a defined period, otherwise they will be destroyed from the user's wallet. While Western countries have expressed concern that it is dystopian, in reality it is a last-ditch attempt by governments eager to boost economic growth and stem the drain of young brains.

Several new crypto payment processors have sprung up from a slew of startups, and the entire crypto industry now adopts "hyperfluid continuous" payments (i.e. payments between and within all crypto-native companies are continuous, while Not weekly/bi-weekly/monthly billing). The rollout of this real-time payment infrastructure in Asia goes beyond just crypto companies, with some forward-thinking traditional tech companies starting to adopt these payment channels in the US as well.

In the decentralized finance (DeFi) space, there are now several competing and mature options markets. For the first time, the total trading volume of options surpassed the spot trading volume, and DeFi entered a new stage of development and adoption. The U.S. national debt continues to increase, with the combined value of on-chain stablecoins and national debt approaching $2 trillion at its peak.

Permissionless segment of Decentralized Finance (DeFi) still generates over $100B in fees from over 500M active users

Trillions of dollars in traditional assets have been moved on-chain, two-thirds permissioned and one-third permissionless. Despite the dominance of permissioned pools, permissionless DeFi still generates over $100 billion in fees from over 500 million active users. Flash loans, structured products, and new infrastructure are gaining popularity, but are still complex and often favor the most sophisticated players.

This was also the year that unsecured lending began to develop significantly, thanks to a confluence of factors: more efficient reputation and identity infrastructure, the proliferation of permissioned DeFi, and now a clear regulatory direction. Early forms of this lending first emerged primarily in Latin America, parts of Africa, and Southeast Asia; in these regions, cryptocurrencies continue to fulfill many of their promises. The falling cost of money in emerging markets has sparked lively discussions about how much influence cryptocurrencies have played in this shift.

While most cryptocurrency social media users don't know it, DeSci is on the move, looking for true product-market fit. Several large pharmaceutical companies use health data networks to conduct clinical trials and obtain richer sample sets. There is optimism about better health outcomes in the future due to advances in data collection and coordination.

Somewhat controversially, a Chinese drug discovery company has announced the development of a new cancer drug that draws on a massive analysis of genomic and treatment data from more than 1 million patients in mainland China. Although the drug has shown promising results in early studies, many Americans have expressed doubts about the validity of the claim.

There are now very sophisticated AI agents capable of reviewing protocol documents, smart contracts, and network architecture; these agents compete with each other

As the discussion of artificial intelligence has become highly political, some in the crypto space have tried to tout the benefits it can offer. Specifically, this information revolves around data privacy, fairness in execution of proprietary models, and authenticity of content generation. Significant efficiency gains in auditing and on-chain security thanks to AI agents. There are now very sophisticated AI agents capable of reviewing protocol documents, smart contracts, and network architecture; these agents compete with each other to find the most profitable vulnerabilities in test environments, as a final simulation before the protocol hits mainnet.

Incremental progress has been made in improving the user interface, enabling users to publicly sign anything they post for verification. However, social consensus has not yet been formed, and much work remains to be done. The music industry still struggles with new technology; many artists try to limit the use of any generative music produced in their image, yet those who embrace it actively and share the proceeds of sales with new generative studios stand to gain the most. We witness the first fictional CGI (Virtual Artist) musician to be recognized by the Recording Industry Association of America (RIAA) for five million sales. Given the slow pace of evolution of copyright law, there is still some ambiguity about the ownership of works created by these artists.

Proposes a plan for a fully self-sufficient energy infrastructure in a mid-size city (100,000-500,000 population) in North Texas, powered by an emerging crypto network. The city operates a municipal utility system that generates renewable energy from solar, wind and battery storage systems across the city. Residential consumers can sell excess energy to neighbors on a peer-to-peer basis or sell it back to the city to meet energy needs during peak demand. Commercial buildings are required to purchase a minimum percentage of energy from renewable sources, further incentivizing activity on the network.

Battery storage systems across the city are optimized by autonomous systems that store excess energy during the day and release energy as needed. Municipal utilities operate some batteries, and private owners can also operate and sell storage services themselves. The city set up a decentralized autonomous organization (DAO) to enable residents to propose and vote on new incentives, cryptocurrency distribution methods and smart city upgrades. The city also offers an open data platform to provide residents with transparency into energy supply and demand. In the event of a power outage, microgrids provide power to critical infrastructure such as hospitals. These microgrids are automatically connected to on-site renewable energy generation and storage systems; residents can choose to connect their homes to these microgrids for backup power or to be paid for contributing power and storage. It's an ambitious plan that has generated significant interest and attention across the country.

Emerging base-layer public blockchains keep rolling out, and while longtime crypto-natives often dismiss them as “unnecessary” or “lack of differentiation,” there are actually new consensus mechanisms afoot. The growth of developers remains stable, with more than 500,000 monthly active developers and more than 100,000 full-time developers. As 2026 draws to a close, the pace of progress has accelerated, and crypto has penetrated mainstream finance and expanded into other large verticals. For those who work directly in encryption, it seems to be ubiquitous, and while still niche to some households, its broader impact is better understood. Some folks in traditional tech are trying to change goals instead of admitting their mistakes, but at this stage, it's all on paper and won't have any impact on progress in 2027.

2027 and 2028 are coming

**Once you see the world as it could be, it is impossible to be satisfied with the reality of the world as it is. **