A few thoughts on the most valuable use of cryptocurrencies.
Bitcoin and other cryptocurrencies have taken over in 2017. According to CoinDesk, Bitcoin started the year at $901 per coin and reached a high of $19,600 in December. The stories of crypto millionaires and billionaires have swept over the world, causing many hopeful speculators to continue investing in the space. But beneath all this hype and speculation rests a technology that I believe has the potential to do a lot of good — blockchain.
Nowadays, the term blockchain is used interchangeably with a database but, in reality, existing database systems work great and there is no need to implement blockchain technology as they are slower and more costly. Blockchains only become useful when there is a strong need for applications to be decentralised, this is where cryptocurrencies come in.
In my opinion, cryptocurrencies are the first native use of blockchain technology. Implementing a blockchain application without a cryptocurrency won’t work as users won’t have an incentive to host the application.
So this raises the question, where are blockchain technology and cryptocurrencies needed? I believe that cryptocurrencies become extremely valuable, for decentralised applications wanting to solve the bootstrapping problem.
The bootstrapping problem is a common problem in companies when they are unable to obtain initial users as their product is not useful at a small scale. For example, a dating application with one user does not provide any application utility. Companies like AirBnB, Uber, and Tinder were able to solve this problem and have had great success. The shared incentive network that cryptocurrencies provide can be a great solution to this.
Traditionally, networks only become valuable when they scale. Cryptocurrencies solve this problem by providing financial utility, in the form of tokens, to early users when there is no application utility. This incentivises them to join the platform early and can help companies bypass this problem.
However, companies that decide to go the crypto route need to keep a few things in mind. First, the product has to be a based on scaling through network effects. If the company is not a truly network effect based company then this route will likely not be beneficial to them. Second, when token sales take place, companies largely lose control of their network; this implies that standard revenue models will no longer be valid as the system becomes peer-to-peer based. Therefore, the primary way for a company to accrue value will be through appreciation of their token.
Fundamentally, there is a lot of promise in blockchain technology. It is still in its nascent stage and nobody knows what this space is going to look like a few years from now. But what excites me is the fact that the network effects become phenomenal in blockchain applications, and the benefits don’t accrue to a single centralised entity. With income inequality constantly rising, I look forward to seeing the role this technology plays in our near future.
I hope you enjoyed reading this article, if you have any questions, comments or would just like to chat feel free to reach out to me at wingvasiksiri@gmail.com
Sources I used to learn about this space, highly recommend to read/watch:
- Alex Rampell, Andreessen Horowitz. December 2017. Decrypting Crypto: From Bitcoin and Blockchain to ICOs. Link
- Fred Wilson. May 2017. Token Summit I — Final Fireside Chat with Fred Wilson and William Mougayar. Link
- Harry Stebbings and Olaf Carlson-Wee. December 2017. 20VC: INSIDE THE WORLD’S LEADING CRYPTO FUND, THE FUTURE EXIT ENVIRONMENT FOR CRYPTO ASSETS & THE BEAUTY OF BENEVOLENT DICTATORSHIP WITH OLAF CARLSON-WEE, FOUNDER @ POLYCHAIN CAPITAL. Link
- Jeremy Liew. November 2017. What are Blockchains and Distributed Apps really good for? Link
