Why do we need real-life proof of products on blockchain?
2017 was a dramatic growth year within the blockchain industry: an unprecedented surge in token sales, bold hyperbolic promises, and regulatory bans. But Q1 2018 is showing a steady pull-back leaving some a little weary.
The ICO trend is declining this month as the crypto market has been down. Speculations on statistics on the share of scam ICOs (MIT research claims 5%, another research claims 85%) have been very popular on social media. There have been more than 2600 ICOs completed since 2014. Of those, there are hundreds of projects with amazing proven teams, but with poor ideas, or great ideas coming from weak teams. Some are also simply scams. In these cases, we rely on the SEC to ban them, or reputable exchanges such as Bittrex to not list them. There are many seasoned teams that have conducted a token sale and have not released a product and respective token network yet so it is early time to evaluate the success of crypto projects. While crypto entrepreneurs are building products in this very immature market there are many challenges faced by the whole ecosystem of the crypto entrepreneurship (crypto funds, token creators, token holders, early adopters).
Here are four main challenges for crypto entrepreneurs and crypto investors in 2018:
1. Too Many New Blockchains
Crypto entrepreneurs, including our team at Propy, are looking at many evolving blockchains for our applications. The promises are great but are they deliverable? Let’s make a short flashback.
In mid-2015, Ethereum’s turing-complete blockchain finally went live. The event marked one year of release promises to its community. For the most part, it was a success until the DAO attack took place in 2016, leaving new entrants frazzled and frustrated.
Ethereum also took roughly three years after its token sale to launch the ERC-20-token system. Ironically, the most popular and most successfully funded token sales utilizing the Ethereum infrastructure are the replicated Ethereum blockchains. Don’t get me wrong, I don’t want to judge whether they are in fact better or not. We at Propy are keeping our eyes on some of these newer technologies.
As the Ethereum example shows, new blockchains need a minimum of two years to evolve. And at least 3–4 years to mature. Having said that, we can conclude that many of these new blockchain projects are only making promises to their communities. The validity of these promises is extremely difficult for even the savviest of technologists to discern as there are yet no proven theoretical guidelines.
The chances of these projects reaching mass adoption are impossible to predict. This technology is so new, that it is hard to compare and make a judgment based on historical metrics. So why then are there so many projects popping up? My hypothesis is that it is much easier to convey the vision and excite people through bold promises than to deliver upon an idea
I will conclude with the famous story of Theranos, which can serve as a parable in this case. The company raised more than $700 million in funding with a $9 billion valuation and was backed by outspoken VCs for eleven years (the company was founded in 2003). Then concerns about the effectiveness of its technology surfaced and the bubble that was booming for those eleven years suddenly burst. Now the founder is fined $500k penalty by SEC, she is banned from holding an executive role at a public company for a period of ten years, and must return nearly 19 million shares.
So with every newly hyped blockchain are we having a “better Ethereum” or actually another Theranos?
2. Real World Blockchain Projects will Survive
In the previous section, I discussed the saturation of the crypto space with too many blockchains. Let’s discuss what the real power of blockchain technology is about — real-world decentralized applications.
As of today, there is a dearth of well-funded projects. However, the majority of these projects are not focused on real-world use cases. The most exciting and dynamic projects are the real world decentralized application projects. They are exciting because they possess the greatest potential for disruption amongst the current technology incumbents. Some real-world app examples of these projects, including ours, are Civic, who are making ID verification and protection accessible for businesses and individuals, BeeToken, a decentralized app for home sharing, AdEx, an advertising platform, and ICONOMI, A Digital Assets Management Platform.
Currently, the spotlight still belongs to the new blockchains & fat protocols. One of their characteristics is that they are somewhat theoretical and might not pass the reality test. Some of them are too far-fetched to have any application in the real economy. Some will also simply never gain the traction they need to sustain the growth of their networks. So it’s a matter of time — at the least a year, realistically two years — before two events will happen.
In the meantime, the spotlight and the highest raise belongs to the new blockchains & fat protocols (Telegram’s TON, Filecoin, Tezos, EOS, Bankor, Status, Kik, MobileGo, Blockstack, SONM, all together raised just over $2B). First, most of the above-mentioned blockchain projects will fail, which might lead to bear markets. Second, Blockchain technology, as well as society, will by then have matured enough that real-life applications will reveal their potential. The advantage of such mature projects is that the public and the investors could better evaluate their probability of success — if only because such projects are certain to disrupt industries and products we all use in our daily lives.
3. There Are More Crypto Funds Created Than the Number of Promising Projects
The title says it all. There is an oversupply of crypto funds at the moment. There are traditional VCs, including the top tier Andreessen Horwitz, Sequoia, which have divisions tasked with investing in Token Sales as an alternative to early-stage startups investments and there are crypto funds that dedicate about 10–20% of their capital to invest in ICOs. Some of them are “veterans” and know the space really well, just like Pantera Capital and Blockchain Capital, some are newly formed but with great crypto or VC experience, such as Arrington XRP Capital (founded by Michael Arrington, Techcrunch founder, early investor in Uber, Pinterest, Airbnb) and Ausum (founded by Jeremy Gardner, previously with Blockchain Capital, founder of Augur), and FBG (very experienced fund in China).
However, there are also newbies that could be easily fooled by the hype and the FOMO. It’s great that the capital inflow to the crypto space is increasing but this is a double-edged sword. The number of crypto funds is higher than the number of reasonable (not even brilliant) startups. This apparent surplus might not seem detrimental now, but it could be dangerous for the blockchain community — scam projects will continue to get funded and investors could be fooled on an even larger scale than in 2017.
4. Market Cap of a Token is Easy to Manipulate
In the traditional world of finance, we are used to gauging a company’s value by its market valuation — the price per share multiplied by the total number of outstanding shares, i.e. the “market cap”. The situation in the crypto space, at first glance, appears to be no different: we are also using a metric called “the market cap”, except this indicator might fool you rather than help you identify the winners and the losers.
In the following example, probably more than half of the TOP 100 valuations in Coinmarketcap.com are questionable. Here is just one vivid example, just a weeks-old-one, of how it is possible to manipulate Coinmarketcap’s valuations:
A project called PACcoin has a market cap of $33 billion; its token price is 0.01 USD (imagine, this is 1/10th of 1 cent!). How is it possible for PACcoin to have such high valuation and rank number 3? Well, it’s because the valuation is equal to the token price multiplied by the number of tokens issued. In this case, the person or the company behind PACcoing decided on an infinite number of total tokens issued, and 2.5 trillion is circulating at the moment. With some simple math — voila! you have a multi-billion valuation for nothing.
Fortunately, the sector is balanced, and a lot of the legit projects have “market cap” lower than their book value. The point here is not pointing out that we are in a bubble but to stress that this indicator is highly dependent on the token creators, and not so much on the market. After the “Internet Bubble” of 2001 burst, there were winners and losers. Those who came out on top were the projects with real-world use cases and the dot-com bubble gave us a better Internet.
Peter Thiel said recently: “Crypto is Libertarian.” It is true that the core values of the technology resemble those of the free market economy and limit financial censorship. Moreover, the ideas for DAOs and governance on the blockchain resemble those of a utopian libertarian state: remember Atlantis from Atlas Shrugged? However, we are not there yet; my plea for the community is to realize that we are in the early ages of development. Therefore, instead of waiting for market forces to bring about devastating corrections, or worse, state regulation to arise, we’d be better off educating ourselves and thus attempting to avoid the instabilities inherent in uninformed markets.
I’d like to thank Denitza Tyufekchieva and Vassilis Vutsadakis from the Propy team for their contributions to this post.
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