Did the Cryptocurrency Revolution Fail?
Blockchain Seemed Poised On The Edge Of Greatness — Is It Dead?
Nothing brings change like a revolution. If successful, they disrupt the status quo and nothing is ever the same again. If they fail, they fail in catastrophe, with bodies swinging from the gallows. But whether successful — the American, French, and Internet revolutions — or failures — the Boxer Rebellion in China or the Great Jewish Revolt against Rome, they are milestones of history. Some fail because outside forces brutally crush them and some fail because the doctrine itself has insurmountable limitations. As the market sits at nearly 10% of its previous high, we stand shaken, witnesses to an attempted revolution. We nurse our wounds, redistribute our meager portfolios, and turn to face the question:
Did the Revolution Fail?
And we must answer this question. We can each focus on our individual mistakes — selling too much at the bottom, buying too much at the top, like a dog chasing its tail. But for own sanity and for the sake of our time, we must look beyond our own mistakes and missed opportunities, and ask ourselves this question. For if the revolution isn’t dead and this is just a temporary roadblock towards a brighter future, then we should all take Rothschild’s sage advice and…
“Buy when there’s blood in the streets, even if the blood is your own” — Baron Rothschild
If the crypto markets aren’t dead, now is when the risk takers make big.
The Cryptocurrency Revolution
It’s easy to classify the cryptocurrency craze as a revolution. Revolutions are built on radical ideas and cryptocurrency was dedicated to eliminating the centralization of money, certainly a radical concept. We can find many similarities to any movement looking to overthrow the status quo. Even the demographics of the cryptocurrency movement surely show similarities to other mass movements. Attracting similar demographics of people: young people, those without families, and those still discovering their path — the risk takers. The doctrine may be different, but what attracts people is always the same: a chance to reinvent themselves, a chance to upturn the source of their frustration, and a chance to wrong rights and institute change. So what can we learn by analyzing crypto in terms of a revolution? First off, we can understand where we are in the process. Crypto failed at evolving from a radical movement to an established transformation. Read The True Believer by Eric Hoffer for interesting perspectives on this. We could say that crypto failed at moving from speculation to application. To understand if this was a minor setback or a backbreaking disaster, we must look closer.
Revolutions depend on both the leaders and the doctrine. We can create the same distinction within the crypto-revolution: projects (leaders) and distributed ledger technology (doctrine).
The last three years saw the emergence of everything from decentralized marketplaces, automated devices, gambling services, currencies, prediction software, and trading platforms. People heralded the potential of blockchain. It truly felt like a revolution. But the result was the emergence of NOTHING TANGIBLE. 2018 was supposed to be “The Year of Adoption.” The only tangible product was a $130 billion crowd-sourcing platform and a decentralized currency — and even that proved highly volatile and difficult and costly to use. It has largely been a failed revolution, at least in the short term. Let’s point fingers.
To uncover the real culprit, we must analyze both the leaders and the doctrine. If we conclude that the leaders failed, but the doctrine is sound, then we simply need new leaders. And new leaders always rise. But if the doctrine is rotten, we should redirect our energy.
As you will read, both were responsible. The projects leading the revolution certainly mishandled their development and scams abounded, but the technological doctrine itself also led to some disappointing outcomes. But all is not lost.
TLDR: If blockchain technology has a future, and project malpractice was largely to blame, the markets will undoubtedly recover. If the technology is inherently flawed, better to spend our energies elsewhere.
Why The Leaders Failed?
Teams and projects led the crypto revolution. And while some were successful, others failed miserably. We need not look far to see many examples of scams and unethical behaviors by projects and teams. The industry certainly attracted the slimy, but it also enabled them. And even many honest leaders met failure without malpractice to blame. Roadblocks were met, errors were made, and fundamentals overlooked.
We can attribute the failure of projects and the dramatic crash to the following:
- Underestimating the Impact of Governmental Regulation
- The Financial Practices of Blockchain Companies
- Poorly Designed Applications
“Governments can’t stop Bitcoin. They can’t regulate it. They won’t regulate it. It won’t matter if they do,” trumpeted the investors. The only one of these statements that proved moderately correct was that governments likely couldn’t really “stop” Bitcoin or cryptocurrencies. But history shows that they sure as hell could cripple the markets. Markets are inherently speculative; reports of SEC crackdowns and Chinese bans didn’t necessarily need to materialize to send the ticker spiraling.
Secondly, regulation both shut down existing companies and limited the ability of new entities to operate. ICOs were targeted by the SEC, people were charged with fraud, and new companies had to jump through legal hoops to establish themselves. Investment funds and private investors had to be extremely cautious entering into the legal minefields of crypto investing. All of this proved to be extremely impactful on the markets as a whole.
Looking Forward: On this front, there are reasons to be optimistic. Assuming that governments cement regulation, the effects will be predictable. Markets will adjust and established laws will provide a clear path forward for financial institutions and entrepreneurs. However, one concern is that regulatory bodies have lost their incentive to prioritize this topic. But according to the SEC’s Examination Priorities, Digital Asset regulation is still a priority.
The Financial Practices
The leadership was hilariously bad for many companies. Projects focused on spending millions on Floyd Mayweather marketing and lavish parties; they misspent, abused funds, lacked good developers, and focused on building hype rather than building a product. This was particularly due to the fundraising model: the ICO.
It’s well-theorized that enormous up-front fundraising leads to poor business practices. Many entrepreneurs became rich without ever fulfilling a promise or developing a successful product. Hard work should lead to successful raising, not the other way around. With tens of millions in the bank after only a whitepaper, companies had little pressure to develop efficiently or effectively.
Moving Forward: A dose of reality will be critical in ensuring quality projects receive funding and poor ones do not. This also isn’t of too much concern. Better leadership exists and will continue to emerge provided the technology is sound.
Poorly Designed Applications
Applications focused far too heavily on integrating blockchain than on attracting users. Most applications failed far earlier, but those that succeeded created clunky products with cumbersome UI/UX, a heavy reliance on centralization, and absolutely no advantage over existing solutions. dApps were pretty much dead on arrival.
Additionally, projects underestimated the difficulty in designing applications with large “action spaces.” Read this for complete coverage of the idea by Elad Verbin. Designing an incentive structure around Bitcoin, where the economics of the application center around two options — “validate or deny transaction” — is relatively simple. Designing an application around systems with multiple actions, and low potential of automatability is enormously challenging. Projects hugely underestimated the difficulty of designing decentralized solutions for many complex problems and failed as a result.
Applying mechanism design to produce systems that run well “in the wild” is a very difficult task even under the best conditions — where the action-spaces of individual players are simple and easy to analyze and optimize. When the actions are hard to optimize, as they would be outside the “less-risky space”, the mechanism designer hardly stands a chance. — Elad Verbin
Looking Forward: I’m less optimistic about this. We now know that blockchain is not universally applicable as we initially thought. We’re still waiting for the killer app — the application that justifies blockchain to the masses. But first, we need to reevaluate our uses for blockchain.
It’s clear that the leaders of the blockchain revolution have failed on several accounts. Projects have failed to effectively manage themselves, they have failed in navigating the regulatory world, and they have failed at developing useful applications. However, despite the failures of some of these projects, there is still hope and enormous potential value provided that the technology foundation is sound.
The Doctrine: Blockchain And Other Distributed Ledger Technologies
It’s clear that the leaders were not the only ones responsible for this crash. The doctrine itself had flaws, failing to appeal to a wide audience, and failing to be significantly impactful. Blockchain is a rather radical doctrine. The emergence of democracy set in motion the decentralization of political systems. Blockchain is the doctrine responsible for the decentralization of digital systems. Whether the doctrine is legitimate can be looked at two ways:
Argument #1: Decentralization is necessary for the security and development of an emerging digital world. As such, the failure of the technology was in part due to it arriving too early. But the demand will eventually arrive.
Argument #2: Decentralization is not necessary and is in fact fundamentally incompatible with human society. Democracy may fall as well one day.
Argument #1: Decentralisation Is Necessary
We must accept that decentralization is both less efficient AND the only way forward. We made that determination with a move towards democracy — but only after hundreds of years of tyranny. Ultimately, we eventually decided that decentralization was paramount, despite the inefficiencies. There is a precedent set.
One must simply peruse the books of history to see that efficiency doesn’t always equate to good.
Centralized has ALWAYS been more efficient — whether in government (tyranny or monarchies), in money (central bank), or in organizations (a coach, a conductor, a CEO). Baseball teams, orchestras, and businesses aren’t democracies for a reason; if they were, progress would be rare. Decentralization is justifiable only if one believes that “absolute power corrupts absolutely.” If absolute power can be wielded honestly and ethically, then the solution is simply to bestow power on the honest and ethical. It worked with our greatest historical leaders. However, if one believes in that age-old tenant, then decentralization is THE ONLY way. Checks on power and democratized decision making — are they inefficient? YES. Is their progress frustrating? YES. Would tyranny accomplish more? CERTAINLY. But one must simply peruse the books of history to see that efficiency doesn’t always equate to good. As such, decentralization isn’t just important, it is critical for a free society.
But revolutions must also appeal to a wide base. They must appropriately identify a problem and build support around a solution. Revolutions die quickly if the status quo is accepted by the masses. Call it the Tyranny of the Status Quo (Credit to Milton Friedman). Don’t fix something if it ain’t broken. The present must be unbearable for people to embrace radical change. There’s a reason fascism and communism didn’t rise in America. So why did the crypto revolution fail to appeal to a wider base (at least for the short term)?
Looking back, despite the numerous data breaches, cases of bank fraud, high costs of money transfers, and “dangers of centralization,” the issues weren’t dramatic enough to necessitate immediate adoption. The truth was, most people remain largely unaffected by these violations of privacy, blind to the risks of centralization, and apathetic to the criminal fees charged by Western Union. The status quo, for the average person, was/is acceptable. And those places where the status quo isn’t acceptable (Zimbabwe, Venezuela, etc.), couldn’t satisfy the demand. Things will need to get dramatically worse before grandma will be interested in Bitcoin.
But it’s reasonable to assume that the demand will arrive. We will need both a digital exchange of value as well as protection for the immense value moving to the digital world (read that argument here). If we accept that the digital world will soon be in need of decentralization, the only question still necessary to answer is whether blockchain is the most effective method for decentralizing?
Are DLTs the Most Effective Method of Decentralizing?
Any revolution must also offer a viable solution to the problem. We are all aware of blockchain’s problems. I don’t feel that I actually have the appropriate knowledge to decide whether blockchain and other DLTs are the right technologies for decentralization given that currently, they’re the only technologies.
Regardless, my thoughts: the platform scaling limitations are widely documented, as have the challenges of advancing innovation in a decentralized environment. Forks abound, Ethereum and Bitcoin remain painfully slow, tradeoffs are deliberated and debated, and we are no closer to applications that can rival Visa — if that was ever the goal. It is not surprising that decentralization has proven significantly less efficient than its centralized counterparts.
But that was also to be expected. I also don’t believe most of the scalability issues won’t be solved with time. And people continue to build new DLTs, offering hope for the future. However, I think tradeoffs will be inherent to decentralized technology; as such, we will need to ask ourselves what should be decentralized.
Viewpoint #2: Decentralization Is Incompatible With Human Society
Liberalism v. Collectivism and it’s relevance to blockchain:
Liberalism v. Collectivism has been perhaps the most profound debate of the last thousand years. Materializing from this debate — and exemplified by the outcome of liberal democracy in the West — are the challenges of decentralization.
Locke and Adams and the leaders of the Reformation were fathers of perhaps the most profound thought revolution of the last thousand years. Liberalism and the idealization of the individual were foundational in ushering in democracy, promoting the nation-state, preventing holy wars, and promoting the individual freedoms that we expect today. Bitcoin seemed only a continuation of that liberal trend: an individual isn’t free if a centralized power can manipulate their means of exchanging value at will. I can only have true self-determination if I, and I alone, am responsible for the safekeeping of my wealth.
The problem is, maybe liberalism, and Bitcoin for that matter is short sited. The fact remains that humans are far from individualistic. We might be individuals in philosophy and thought, but our actions uncover our proclivity towards collectivism. We define ourselves, perhaps first by our names, but second by our group identities: our religion, our political beliefs, our families, communities, countries, cities. It is conceivable that liberalism is quite contradictory to our natural way of being (credit to this thought piece).
How does this relate to cryptocurrency? Well, perhaps decentralization is not the way. Perhaps the costs outweigh the benefits in many cases. Perhaps many of the emerging blockchain applications are actually contradictory to our normal ways of being. We like our credit card rewards and the ability to blame others for failures. We like efficiency. We like the collectivism, the security, the controlled interest rates. If we take this opinion, we must conclude that blockchain will die as will all DLTs. Democracy may not be far behind.
The truth lies somewhere in between. Decentralization and blockchain certainly offer advantages in regards to safety and security. However, they suffer from the same limitations that affect all decentralized organizations. If we accept that some of these limitations are impossible to overcome but also appreciate the importance of decentralization, then the question is: where and to what can we apply blockchain?
The Real Use Cases
The only chance we have is in trying to predict the short term trajectory of blockchain and crypto (5 to 10 years). Predicting anything beyond that is impossible; we can’t anticipate the future state of other technologies; are oblivious to the inevitable shifts in the economy and world order; or how the demands for decentralization will evolve. No one could have predicted eBay, Facebook, YouTube, Snapchat, or Waze in 1995.
Looking at the short term, I believe we will see DLT adoption in the following four areas:
- Decentralized Stores of Value: the importance of scarce, digital stores of value will continue to grow. I don’t think Bitcoin will die anytime soon and challengers will emerge. I believe we will also see the rise of more efficient cryptocurrencies that will begin to gain more widespread use in online marketplaces. This, however, won’t be overnight.
- Areas where intercompany collaboration is too cumbersome and expensive: DLT will first see adoption in industries where collaboration between entities is high and trust is low. Currently, the only way of overcoming these challenges is through complicated documentation techniques. As such, these industries would benefit from adopting DLTs, in spite of their inefficiencies. The industry most likely fitting this category is supply chains, whether for agriculture, manufacturing, or food production.
3. Emerging IoT technology: The coming IoT revolution will create enormous demand for secure technology that enables devices to interact, share information, and automate decisions. Considering that many companies will likely be operating across the Internet of Things, blockchain could offer a viable solution to the expected difficulties of collaboration.
4. Digital assets such as collectibles or stocks: We will continue seeing the emergence of digital assets, both collectibles, and stocks. I think the video game industry will likely adopt this solution for in-game tradeables, especially considering video games are already digital. I expect many equities to make a transition to digital assets as well. It is only a matter of time until Apple stocks are digitally scarce.
A side note: watch closely those companies that emerge to compliment those industries above. Wallets, investment tools, and security upgrades will succeed along with the development of DLT use cases. Kzen Networks is an interesting wallet technology to watch. Their wallet is called ZenGo.
Revolutions are always messy. Radical ideas are never without issues and the old order never goes quietly. DLT’s rollercoaster last few years has all the makings of both the early stages of a successful revolution or the characteristical ashes of a failed one.
I believe the answer rests somewhere in the middle. We must take our dose of reality, recognizing that greed and mismanagement led to the failure of many companies, an overestimation of the potential of the technology led to enormous speculation, and resisting institutions had far more impact than initially expected. In some ways, we failed to respect the enormity of the centralization v. decentralization debate — ours is only a microcosm of a thousand-year war.
At the same time, we must not let fear cloud our judgment. Many fundamentals of blockchain and other DLTs have not changed. There are still many legitimate uses for the technology, albeit not as many as initially speculated. DLT continues to make astounding headlines (credit to Think Outside the Blox). But we must be wiser; stingier; more demanding of teams and leaders. We must look more critically and be more diligent. Blockchain and DLT will be impactful — how so must still be determined.
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Disclaimer: This is not investment advice, merely my opinion on the topic. Do your own research.