Back in 2009, Bitcoin came to be the first decentralized cryptocurrency. The existing thinking then was that the cryptocurrency market appeared to be a winner-takes-all competition due to the powerful network effects around mining. And, most thought that Bitcoin would appear as the winner in this competition.
What happened? Bitcoin, and the hidden blockchain technology did not enhance a strong use case besides keeping value. Bitcoin fell short in becoming a significant payment method. Its ecosystem was plagued with infighting, showing that governance structures were not as firm as everyone had concluded. This does not signify the end of Bitcoin; keeping or storing value can be a huge market chance as we have just witnessed in the run-up of the Bitcoin price over the past year – the same to the role that gold plays in the offline society. But it does unlock the door to other players in cryptocurrency.
Ethereum and the second act
In 2016, we had witnessed the second act for cryptocurrencies with the progress of Ethereum and its emphasis on smart contract functionality. Ethereum also initiated a significant innovation in tokens. In the Ethereum ecosystem, tokens can represent any fungible tradable good, including coins, loyalty points, gold certificates, IOUs, and in-game products. What creates tokens certainly interesting is that they allow built-in monetization of software projects. From Alex Felix:
“Utilizing a native cyptoasset paywall (or “tokenized ecosystem”) needed for network services is linked to price. Thus, cryptoassets can both represent and seize value. […] As differentiated to a traditional third-party shareholder structure, the economic design of a decentralized network truly assists in aligning the interests of key stakeholders and lets them take advantage directly from the value they make. As a result, public Blockchain projects are well placed to overcome a number of key obstacles that plagued traditional OSS commercialization.”
While still too early, Ethereum has also opened new utilize cases, like decentralized storage (https://sia.tech/) and decentralized prediction markets (https://www.augur.net/).
The emerged of Ethereum reveals that cryptocurrency is not the winner-takes-all market that we once had believed. It is evolving from a sole player with a tight use case (storing value) into an ecosystem with at least two cryptocurrencies at scale, and many others trying to gain to scale.
We are witnessing interesting new use cases created on top of cryptocurrencies and the new capability to monetize software and open source. Making a new financial incentive can actually turn out to be the most significant pilot for future innovation in this space.
While we have never been more confident than today regarding the capability of cryptocurrencies, some huge questions still remain:
- Utilizing tokens in crowdfunding campaigns is an innovative method to capitalize projects that were once difficult to capitalize and aligns stakeholders around a project. Yet, the emergence of tokens has also captivated a lot of weaker projects in search of easy money. The public breakdown of some of those projects can really hurt the hidden innovation, at least in the short term. Will this token-driven crowdfunding market come to be the equivalent of OTC/pink slip markets, controlled by speculators and promoters? Or, will professional investors appear and produce a particular level of due diligence and reputability?
- There’s also the matter of safety or the security (or the lack thereof). The hack on The Dao, one of the most well known Ethereum-based projects, proved that the security problem has not yet been solved. Theirs is so many of potential mistrust in the ecosystem.
- Lastly, some of the rising use cases may not be perfectly legal…like for example, running a prediction market = a betting operation. The latest answer is that the operations are totally decentralized which creates then difficult to take down (but they’re still not legal). What we want now are more use cases that are completely legal in the present legislative environment and produce a true value-add.
2017 could be the year that cryptocurrencies begin delivering on the broad potential a lot of people saw in them for a long time and we will be diligently investing in the space.