What crypto bubble got right
Big bubbles always have something real underneath, so even smart people got sucked into them. Crypto bubble of 2017 was not unique in that sense.
This time bubble inflated all around ICOs and Ethereum which looked exactly like Yahoo in dotcom bubble. A snake that eats itself.
Investors looked at Yahoo as proof that Internet companies can make money. So they invested in new startups that promised to be the next Yahoo. As soon as these startups got the money they were buying millions of dollars worth of advertising on Yahoo to promote their brand. Yahoo was, in effect, in the centre of a Ponzi scheme. The analogy worked for Ethreum, investors saw ICO’s as a speculative machine, but to participate in it you need to buy ETH, which brings its price up. ETH goes up, more ICOs got funded and the cycle repeats itself.
Nonetheless, the core underneath this frenzy was that uncensorable global networks with the shared state are completely unique tools for the history of humankind, we just touched what they are capable of.
But there is a problem, uncensorability comes from decentralization which comes at expense of efficiency and speed. So such networks can compete only with the most inefficient gatekeepers of all — governments. Monopoly on money is the main power of every government. Which is why the first and most powerful uncensorable network was the money network e.g. Bitcoin.
Bitcoin on par with privacy coins as an unseizable store of value never existed before and already helps people to exit adverse financial systems. Other proved applications of such networks are just derivatives of money. What are they? Equity and debt.
Equity.
ICOs are insanely powerful standard for equity markets, borderless, unstoppable early-stage financing with programmable rights. Token sale crowd-funds have raised close to $29.6 Billion. If this proves anything, it is that there is clearly an under-satisfied market demand for crowd-sale offerings that compensate retail investors with assets that have equity-like risk profiles. Equity crowd-funding mechanisms, however, pre-date the ICO phenomenon significantly — so how does one explain the sudden burst of interest? If equity crowd-sales have been technically feasible and in production for years, what aspect of the token sale ecosystem did Ethereum uniquely enable from a technological perspective? In my view, the answer is plain simple: the ERC20 token standard created the common rails on top of which a diverse ecosystem of secondary markets for tokens could be built in a permission-less and interoperable manner. Judged on investor liquidity alone, token crowd-sales are a step-function improvement over the status quo of equity fundraising. However, this time ICO issuers got scared to create equity-like tokens which can accrue fee from network usage as it would be deemed as security. So instead, of equity tokens, we traded pure garbage but nonetheless created a huge economy… of garbage.
I can understand why it happened, nobody wanted to go to jail but wanted the money. What amazes me more than anything is the sheer extent smart people are ready to go to fool themselves and create mind loopholes where a token can accrue any meaningful value as a medium of exchange. But I can not repeat it enough times, a token can accrue value if supply is restricted and a token is getting out of supply for some reason, in case of gold or digital gold like Bitcoin when it recognised as a Store of Value (SoV). Another efficient and fair mechanism is equity-like mechanics which makes token to give dividends. Everything else as the burning of tokens is an option, but again it’s just a workaround regulation to copy equity-like mechanics. Some people can say that Security Token Offerings (STOs) is the way to go, but it will not work merely because it combines regulatory scrutiny and slow blockchains. Just imagine a head pain project should go through and amount of money to spend to get a license to trade in every possible jurisdiction. After all that, the token could be bought only by accredited investors. Even more so, no current crypto exchange will list your token and there will be zero liquidity for you, which is death.
All that brings me to an important point that crypto community does not like to speak often and generally shy away from, almost everything valuable that you can create here will be against the rules in one way or another, so really decentralized networks and better with anonymous developers are essential for the next valuable crypto networks. Because only in that way, they can really cut corners and bend regulations until regulators themselves ease off the rules they have established.
I guess, If you want to build a parallel financial system you can not expect that everything will go smoothly with the government.
Debt.
Our world just can not function without debt, no functional economy can. Some people don’t see it yet, but debt already penetrated crypto universe through Ethereum with stablecoin called Dai created by MakerDAO. Bitcoin maximalists would kill me for saying that, but throughout history, debt was quite often in use as a medium of exchange and right now is not an exception. ETH token itself very quietly have found it’s SoV property as collateral for the creation of Dai and potentially as collateral for other debt like assets. It amazes me to see that ICO treasures already have a similar percentage of ETH to the amount of locked collateral in MakerDAO system.
What exactly will come next nobody knows yet, but at least we can try not to repeat the same mistakes and be honest about the current real possibilities of the technology. We just can not spend this opportunity again on a plethora of get rich quick schemes — the future of money and finance is at stake.
P.S. I have escaped crypto crash mainly because of Paul Graham essay “What The Bubble Got Right”. This poorly written knock-off might help some newcomers not to make mistakes which we’ve done and maybe escape the next bubble.
