Mindless blockchain ecosystem vs Promising token-economy
The Web 2.0 as we know it has deeply changed the structure of our society and of our economy. The internet network has fluidized information exchanges all around the world, helping us to work toward a unified worldwide civilization, and allowing the creation of global collaborative networks.
But the Web 2.0 has failed to really empower individuals. The centralized digital infrastructure is too vulnerable to hacks and data leaks, and guarantees no individual privacy. Major digital companies have a monopoly control over global information and communities’ networks.
The fact that power is concentrated among so few companies has made it possible to weaponize the web at scale. With the coming age of Internet of Things and artificial intelligence, this is creating an unmanageable data environment, where more data control means more power than ever in history.
We so understand all the promises of blockchain ecosystem, in the willing to build a decentralized Web 3.0 for value exchanges, which aims at giving back to individuals the power to monetize the use of their data.
Simultaneously, we have entered the 2nd wave of the Industry 4.0 that will fundamentally alter and transform many economic models. In its scale, scope, and complexity, the next transformation will be unlike anything humankind has experienced before. The 4th industrial revolution brings the fusion of the digital-, physical- and virtual world, surfing on the advent of disruptive technologies such as artificial intelligence, blockchain, autonomous robotics, IoT, or quantum computing.
However, the hype around blockchain use cases in this evolving environment is massive and mindless. Too few understand what it really means, and the term is mainly used as a buzzword. We explore in this article the pros and cons of this disruptive technology, to make a distinction between unsustainable promises and current reality.
Technically speaking, blockchain is a subset of a database with specific rules about how to put data into the database. New data cannot conflict with data that is already in the database (consistent), it’s append-only (immutable), and the data itself is locked to an owner (ownable). Everyone agrees on what the state of the things in the database are without a central party. This implies there is no single point of failure.
The immutable audit trail uncontrolled by any single party is certainly useful, but there are many costs to create such a system. The costs of maintaining a blockchain are far higher than for a traditional centralized database. These costs need to be justified by its utility.
All such systems have to be designed from the outset to be consistent. There is no “move fast and break things” in a blockchain, due to its decentralized nature. You need consensus, or the agreement of all players in the system, in order to change the database. And because of the overhead of transmission, verification and storage, scaling is several orders of magnitude harder than in a traditional centralized system.
Adding the right incentive structures and making sure that all actors in the system cannot abuse or corrupt the database asks likewise for a large and careful consideration. All incentives need to be aligned not only at the beginning but at all points in the future as technology and companies change.
Decentralized systems are highly difficult to work with, expensive to maintain, hard to upgrade and a pain to scale. Currently, a centralized database is much faster, less expensive, easier to maintain and easier to upgrade than a blockchain. Using a blockchain to write a receipt, perform a centralized service or backup data is nonsense. There are already tools that master these things better.
The main reason to use blockchain seems to be the decentralize part, i.e. to remove the single point of failure or control. But most industries don’t have much use for this. The only use case widely recognized as promising for blockchain is for money usage. Immutability and difficulty of changing rules is, in this case, a real advantage - and not a detriment as it is for most industrial use cases.
Currently, the most successful part of blockchains is for raising money from the public via ICOs. All the hype finds here its perfect playground. ICOs have become a lot more popular with the launch of Ethereum network, as it was largely designed around the ability to launch ICOs. The usual reason for raising funds in this way is to fund the development and marketing of a new project linked (directly or indirectly) with blockchain, and using a token (even if it doesn’t make sense). However, the terms of ICOs are mainly exploitive for the buyers, and they’re often manipulated through discounted private pre-sale, pay-for-exchange listings and other morally questionable activities.
Obviously, the companies selling the tokens have interests in getting money, but the conditions under which they sell ensure almost no protection whatsoever. This hurts the investors who have no guarantee of any returned good or service, but also the companies, which are not forced to find a path to profitability.
However, thanks to widespread speculation on the market, opportunistic investors are still gaining money through ICOs. If well marketed and sufficiently forward-looking, the ICO will end quickly enough to generate the feeling of a missed opportunity within the community, which will naturally lead to tension on the token price when listed on exchange. In the end, larger investors can found their return on investment thanks to mainstream frenzy, and ICO projects got the money they are looking for, letting the uninformed public with a worthless token.
In view of these last demonstrations, it seems that blockchains will have no promising use cases except the one linked with money, and that ICOs are mainly associated with fraudulent behaviors. However, the truthfulness of these assumptions doesn’t mean that there is no future for this disruptive technology. Money is a big deal, and if blockchain end up recording a large part of transactions within our economy, its transformative potential will find its true meaning. Crypto-assets and token are conceived as complementary currencies, and ICOs are only a way, among others, to ensure the initial distribution and to spread their usage in a virtuous economy. As mindless the blockchain ecosystem can be, it doesn’t tarnish the promise of token-economy.
In this new landscape, blockchains are not just a secure ledger for cryptocurrencies and other digital assets, but represented something much more transformative: a decentralized data infrastructure that could solve technical and market problems across a variety of emerging technologies. In these decentralized networks, crypto-tokens are a critical missing component — the first digital mass coordination mechanism for humans, bots and machines.
The industry is rapidly experimenting with new consensus mechanisms and decision-making techniques to coordinate and govern the emerging token economy. This experimentation began with Bitcoin and spawned thousands of tokens each with different rules to encourage or discourage behaviors within the network and allocate resources. Tokens and automated decision-making tools are looking to disrupt entire industries through a distributed coordination network.
There are currently two types of tokens: crypto-assets and cryptocurrencies. Cryptocurrencies will be designed to be a medium of exchange where crypto-assets will be designed to be a store of value and offer utility in a digital economy. Dominant token ecosystems have an element of both, and it involves design challenges to incentivize usage with a single token. Multi-token systems might become a more effective mechanism.
Although the industry is currently focused on the initial distribution of these tokens in generation events, this process is just the initial stage of building a sustainable ecosystem. A lot of projects are unprepared for sustainable growth and utility, and most of them will fail. Thanks to the open-source nature of the ecosystem, learnings and code will remain available to all, allowing to build new systems faster than ever. The industry is testing economic theories in real-time with real money, which could be the greatest experiment in socio-economics we have ever seen.
Tokens themselves are only a type of value instrument, where the rules for generation, distribution and management are shared within a specific community. Some projects are experimenting with automated governance in an attempt to protect the community from a single human decision-making process. In the near future, blockchains and tokens will be issued, distributed, governed and owned in increasingly diverse ways.
We are still in the very early stages of understanding how to design token economies and the governance models that support them. The momentum behind decentralized networks and the bright minds that are working together from all around the world should make you confident on the coming advent of this convergence between Web 3.0 and Industry 4.0 around token economy.
This article is mainly inspired by previous medium post from:
Jimmy Song, a Bitcoin Educator, Developer and Entrepreneur:
And
Outlier Ventures, a venture capital firm focused on blockchain and decentralised ledger technology:
- VC for The Decentralised Future: Introducing the Convergence Ecosystem [1]
- The End of Scale: Blockchains, Community, & Crypto Governance [2]
Readings from recognized influencers — be they critical or enthusiastic — in addition to professional experience in the area, made me developed a strong expertise within the blockchain ecosystem. Merged with Data Science excellence thanks to my partner Pierre, we were able to launch Nyctale, a non-ICO blockchain startup dedicated to develop a better understanding of crypto-assets evolution and valorization.
