Why I think market valuations are a burden to blockchain innovation

Looking back on 2017, we can safely say that this has been the most turbulent year in the short history of blockchain and cryptocurrencies so far. Of course we’re still only at the beginning, but with the total market capitalization of the sector growing from $17B to over $600B, it has shown a tremendous growth in valuation.

Total market capitalization of cryptocurrencies in 2017

It is those valuations, however, that I think are becoming more and more of a burden to the technological innovation.

Especially the last year alone, a lot of things happened in the landscape of cryptocurrencies and blockchain technology. New players and ideas are being tested left and right, hoping to solve the shortcomings of the existing proven blockchain technology that underlies Bitcoin. Whilst some are merely tuning some of the parameters to Bitcoins technology, but staying close to the fundamental principle of Bitcoins Proof-of-Work blockchain, others tend to look for completely new and innovative alternatives to it.

In essence, this is great: everyone in the sector agrees that there are some shortcomings to Bitcoins technology that tend to become more visible every day, now that the scale of usage is increasing. Hoping to solve some of the scalability issues that Bitcoin has is a very promising endeavor and could potentially dethrone Bitcoin from its ever so strong top position in the market.

But there’s something that burden these newcomers in the market in a way that Bitcoin never experienced, which is why I see a difficult road ahead for a lot of these new projects.

In the early days of Bitcoin, it had no monetary value. This allowed its developers to focus on its technological merits, and spend tireless efforts into making Bitcoin into the robust technology it is today. Not much has changed ever since its inception and it was stable, working technology the day it was launched to its (small base of) users. At the time, it still had hardly any monetary value. It’s that same technology that a lot of projects are based on.

What we already saw happening in Bitcoin’s scaling debate, is that monetary interests complicate things. The discussion has never been purely about the technology, but there were large monetary consequences that weighed the discussion down to a big extent.

We see the same thing happening with newcomers trying to improve on Bitcoins underlying technology. Whilst they are still working hard at achieving their goal, at the same time they have a huge valuation. This means there are accordingly a lot of people — small and big investors — that will go a long way to protect their investment. Many projects in the Coinmarketcap top 20 are at this point still theoretical successors to the Bitcoin blockchain, but have not yet been successfully tested at scale, or even developed to the full extent of the original idea. Yet they have valuations reaching over dozens of billions of dollars.

The problem that arises, is that fundamental technical discussions about the idea or its current state of development tend to become difficult to have. Since there’s too many people with a too high stake to be willing to admit there are fundamental flaws in their idea. There seems to be no more room for an open and transparent discussion about the potential flaws in a new blockchain technology that’s worth billions of dollars, since there’s marketing teams at work protecting their investors’ best interest.

Plus, most of the projects have large communities that seem to go a long way in trying to “help” their investment become the winner in the race towards the best, most scalable, most secure, most adopted blockchain technology. But do so by qualifying criticism as nonsense, and trying to have negative impact on their competing projects.

This whole dynamic makes it very hard to assess the motivation of both criticism to a project and the answers to that criticism. Is it an unfounded attack from a competing project’s investor? Is the answer molded by a marketing team or fully transparent and honest developer feedback?

It’s important to understand that many investors in the space are fundamentally incapable of analyzing the technology behind the blockchain projects into great detail. Something that is needed to fully comprehend what they’re invested in. It’s easy to read and understand a whitepaper, but it’s almost impossible for a majority of investors to be assured that it’s technically sound and viable.

We can increase the rate of innovation when we allow each other to have honest and open discussions about the potential flaws or shortcomings in new technology. When we try to better and improve our works to overcome these issues without having to worry about valuation.

As long as discussions are stifled to protect investors interests, there will be a declining rate of progress.

How I think we can prevent this partly, is to push back public offerings as far as possible. Raise only the capital needed to prove or disprove your idea. Prevent large marketing investments before you have fully working technology. Stay under the radar until you have something worth investing in.

I know that this is probably a very naive way of looking at things, and in the current investment climate it’s more opportunism that sets the tone. But I can’t help but think that true technological innovation is not achieved by marketing teams and communities battling one another over who is worse and who is better, but is done by technical people challenging each other to bring out the best in what we can offer to the ecosystem.