The Crypto-Awakening — or: what happens after the crash?
You can read in my more recent previous articles how I think about the crypto bubble and its bursting as well as what I think a reasonable value for bitcoin and the blockchain might be. That is not what I want to focus on today. Whether you believe the bubble will continue to burst in a further leg down (I do) or you think that the worst is over and we are off to new highs, the question what happens next with regard to the value of the 1000s of crypto assets and ICOs is likely an interesting one to ponder if you follow crypto at all. I would like to give my answer to that question.
What does real value look like in the post-bubble blockchain world?
Take your crypto portfolio app right now and make a screenshot of your favorite crypto assets with their cute little logos. Now imagine showing this to your grandchildren accompanied with the words “These were the pieces of virtual air we all valued at more than 1 trillion USD back then and people paid their year’s salary to own a few” (or if you must take a “bitcoin will replace fiat view” imagine saying these were valued at 50m bitcoin). Take a moment and think whether these exact symbols on your screen will truly still be worth that much or whether that statement will just cause disbelief with your grandchildren? I’ll leave the answer to this question to you.
The more the blockchain hype recedes and gives way to true usage of the technology, the more crypto assets will separate value-wise. While I believe all will still go down in value from here (but that is not my point), there will be a separation by quality and only those assets with a true value proposition will survive. The rest will simply disappear. So what kind of value propositions can crypto offer? Much like Facebook and Google came about after the .com bubble burst, some value generators may not even be around yet. I am not technically adept enough to be considered a true expert on the future of blockchain, but I think I have some reasonable ideas in regards to blockchain value propositions that will survive.
The blockchain value propositions & use cases that will survive the bust
1) Store of Value
This is the obvious one, so let’s get it out of the way. If humanity can attach stable value to a rare shiny metal like Gold there is no reason we cannot attach that same value to a digital version of it. It is highly unlikely that this kind of status would be shared by many different crypto assets and if any of them attains this, the current front runner is obviously bitcoin. If bitcoin were to take over the role entirely from Gold, one coin would cost 370,000 USD at current bullion prices. Given this requires full government buy in (no, the people of the future will not want to live in libertarian anarchies where nobody takes care of one another anymore) and also a reversal of thousands of years of solid track record as a store of value by Gold, I would not bet on that 370k figure too quickly or in too large a size. Nevertheless, this is very clearly an obvious use case.
2) Medium of exchange
I have written before why bitcoin will not be both a store of value and a medium of exchange in my eyes and you can read the article if that interests you (or read about the gold standard and join me in hoping it never happens again). However, the use case is clear. Instead of relying on a slow and centralized (ie hackable) medium of exchange such as the existing fiat currencies on the SWIFT system, a blockchain based “crypto dollar” similarly controlled by the central bank and issued by the government but transferable in seconds and ideally with a decentralized ledger is almost a no brainer. This kind of legal tender will make tax collection as well as payments and transfers a lot more efficient. There might be a completely decentralized alternative, but given this again would need government buy in and practically the status of legal tender, it is not a given this will happen. It’s more a long-shot. Note that people who have to follow laws and regulations as well as companies are not 1s and 0s on the net somewhere. They can actually be sanctioned by governments, democratic and autocratic alike. Therefore, they will likely go with whatever is legal. If there were a truly decentralized alternative, something that works as lightning fast and free as Nano/Raiblocks, that would stand a good chance.
3) Privacy and Illegitimate uses
The third use case that I am sure of concerns privacy. While a decentralized ledger in theory provides more transparency than any banking system if the account can be connected to a name, with bitcoin tumblers, mimble wimble and numerous privacy-oriented blockchains having been established, there now exists a way to completely hide your wealth and evade taxes that rivals the heydays of Swiss banking secrecy. Whatever one might think of tax evasion, money laundering or simply a very innocent desire to retain some privacy over one’s assets vis-a-vis the government or other people, no one will deny that the demand is there. I want to stress that this demand quite probably is just as strong if not stronger from legitimate sources like minorities living under a hostile government or simply a basic right to privacy as opposed to the illegitimate ones. The blockchains that offer this value must be immutable, untraceable, decentralized and have an active, anonymous and dispersed developer community. I am not too sure which of the current contestants such as Monero, Sumokoin, ZCash, Dash and ZCoin really offers all of these, but there is a good chance many of them will survive. The more different privacy chains there will be, by the way, the lower the value of one individual chain will be. Briefly stop to ponder about that in the wake of their multi-billion USD market caps…
Decentralized exchange protocols would belong to this category as well, though I fail to see how they require a token.
4) Tokenization of (Financial) Securities
This is a truly obvious use case as well. There is not a doubt in my mind that future equity will be tokenized. It has too many advantages, one of the biggest ones being the missing need for clearing houses and directly provable (and transparency of) ownership without intermediaries. There are many other benefits like efficient shareholder voting mechanisms. In short, shareholder equity and perhaps also debt belongs on the blockchain and is, perhaps, its most native application when all the dust settles. Obviously this requires compliance with existing securities regulations.
That being said I would like to state that any such token (an equity token) will require to be traded on a massive, decentralized and immutable blockchain or on one that is centralized amongst known and trusted financial actors. If you truly, truly think a token like Polymath or Jibrel can provide the backbone to actual “crypto depositary receipts” or direct equity of reputable companies I think you will wake up to find that they are really quite useless unless they manage to build said blockchain. No half-way sane manager would transfer equity in his or her company to anything less than the best blockchain. Note that currently both token are simply using Ethereum as their blockchain (which begs the question why one needs the Poly and Jibrel token other than to provide founders with a “money grab” opportunity of the classic ICO type) and I wonder why CEOs would not simply choose the Bitcoin blockchain or (much more likely) one ran by the very same Wall Street actors that run the infrastructure today. In any case, without a blockchain of their own (a project that Polymath deleted from their whitepaper if I am not mistaken) that rivals the security of the current mainstays, I do not believe either of the current contestants will manage to truly unlock this use case. But I may be mistaken.
5) “Service” blockchains (true “utility” token)
When I speak of service blockchains, I mean any kind of maintained blockchain that businesses and individuals who lack the resources, time or knowledge to run their own blockchains can use against a fee in order to still be able to integrate the advantages of the blockchain into their services, products and processes.
There are numerous examples already. Decentralized computing power that can be used for any kind of applications (such as the infamous crypto kitties) like messaging, gaming, statistics and other tasks in an obvious one (it’s prime member of course being Ethereum). Decentralized file storage (possibly like Filecoin if it ever launches) with its own blockchain is another example that seems like a perfect fit with crypto, as is a messaging app that provides private and immutable communication or a social network that does not have a central owner of the data. The list goes on though with more specialized offerings such as a dedicated blockchain for specific programming languages like Java and Python or one for the proof of ownership and provenance of assets such as artworks. Immutable and actually enforceable “smart-contracts” and advanced governance such as Tezos wants to offer (and Ethereum in part does; while Bitcoin theoretically could) provide additional use cases.
All of the above have some clear characteristics that a service blockchain cannot be successful without, namely they are blockchains (ie an actual chain with a method of proof like proof of work or proof of stake) and they provide an immutable and decentralized ledger. Most notably — none of them are token built on another blockchain (unless the token kind of is the product itself). That defeats the purpose. If you offer the service of storing files on the Ethereum blockchain by having users pay with your ERC-20 token, you are really just offering Ethereum as a service. I do not think that has a future as people will simply be able to use Ethereum directly and not use your meta-token. Neither do any of the ICOs and other ERC-20 token unless they morph into true ownership (read: equity) in the underlying start ups. A “network effect” in an ERC-20 token is really just a “theory of greater fools”.
Finally on this use case — I do think that there is a place for centralized service blockchains. Those would be blockchains where every resource providing the proof of the ledger is centrally owned by a company. Ripple and Iota are examples of these (though not exactly good ones). They would be used only if the owning entity is so vast or trusted and the code so user friendly that these factors outweigh the significant disadvantages of centralization. While this is a use case I believe neither the aforementioned projects’ token nor the actual token in such a blockchain if it were run by, say, Amazon or Apple would have any individual value whatsoever. The market cap of such token today is pure hot air in my view.
6) Dataism
I have chosen the name that Yuval Harari gives to the world’s latest “religion” in his book “Homo Deus” for the last blockchain use case that I can currently see. I have to admit this goes a bit too far into the technical for my humble understanding, but what I mean here is essentially what I think Blockstack is trying to build. A truly decentralized web where the “public” or “transparent” blockchain is really just a set of links to super-ceding and adjacent chains that contain the actual data and can be enabled for access by counter party or denying such access. Apologies if I am being unclear here, it is truly for lack of technical understanding. What I mean is in essence a digital world where everyone truly owns his/her own data (including browsing history, personal characteristics such as age and sexuality and all other kind of data) and third parties (entities, computers or people) can only access, use or save these with permission of the actual owner. A kind of decentralized identity if you will. I do have no idea how this works technically, but I understand it is possible and I can therefore very easily see the use case.
I am sure there are numerous other use cases that I cannot even dream of currently, but the above provides a good summary of my thoughts in blockchain use cases.
Where does this leave us looking at the current crypto assets?
I will try to avoid “pointing fingers” to individual assets being traded for horrendous sums of value (yes, the US Dollar represents a value; it is the medium of exchange for the value you generate as a resource for the economy; perhaps stop thinking “it’s just fiat”) these days, but I would simply say that any asset that has a true future likely needs to develop a new use case or fit into one of the above. To have any value at all, it would need to satisfy as many of the following criteria as possible:
- Decentralized or run by a universally trusted counter party
- A complete blockchain with its own proof mechanism
- Equity- or debtlike, legally defendable rights (read: be a fully-fledged security)
- A strong and active community of developers
- A feature not easily copied (forked)
Looking at this list, which probably can still be expanded on and comparing it to the current Top 100 on coinmarketcap, I do not see many survivors. Especially the ICO token world will take a massive hit. All others will scramble to fill the above use cases and the ones that truly do will thrive.
Remember this when you are telling your grandchildren that story about the funny little icons next to tokenized air that were oh so precious to us simpletons. Thanks for reading. Clap if you enjoyed it and find me on Twitter.
Further reading:
Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. Most of all this is not investment advice. Crypto assets can fluctuate widely in value and all of your capital can be lost. Any negative views expressed are solely aimed at the token in question, never at the development teams behind them.
