What Bear Market?
Despite cryptocurrency prices tanking harder than the 2013–2017 Philadelphia 76ers, the quality of blockchain development and innovation is set to see drastic improvement going forward. With the ease of accumulating capital stripped away, entrepreneurs and developers have been forced to focus on building infrastructure (i.e. Lightning Labs, Parity Technologies, etc.) and distinguishing use cases that actually benefit from a decentralized backbone (still limited and widely debated).
This approach is exactly what blockchain technology needs right now. The ongoing Bitcoin experiment has shown there is tremendous value in the disintermediation of digital commerce. But decentralized infrastructure comes with implementation challenges such as scalability constraints, transaction latency, and increasing computational costs, all of which hinder adoption. These hurdles don’t even account for the steep learning curve, regulatory inconsistencies, and possible platform token volatility that also stifle research and development enthusiasm at the corporate and user levels.
These are limitations that need to be remedied for blockchain technology to start impacting the way we exchange value and conduct business. Without the lure of immediate riches through magic internet money, now is the opportunity for all invested parties, from developers and entrepreneurs to enterprises, to start building quality projects that deliver long-term value.
Sifting Through the Media Noise
The cryptocurrency market sentiment was as frothy as the prices in 2017, but news outlets have veered too far towards the opposite end of the spectrum last year. Most headlines have zeroed in on the massive price collapse, exit scams, and crypto company layoffs. Naysayers and permabears have crawled out from under their rocks en masse. “Bitcoin is dead” has now been declared 336 times since inception.
These reports deserve to be a part of the current narrative, but they fail to tell the whole story. In just the last two years, the overall blockchain job and cryptocurrency markets have grown exponentially by 668% and 613%respectively. ConsenSys, the fast moving blockchain startup out of Brooklyn, NY, alone grew from around 100 to over 1,000 employees in that timeframe. Therefore, the company’s recent layoffs and restructuring of its priorities should be seen more as a natural maturation than an imminent demise. Moreover, the blockchain engineer job market has continued to see steady growth throughout this downturn, ranking as the top new occupation in LinkedIn’s Emerging Jobs Report.
And to the Bitcoin skeptics, the Bitcoin blockchain is still supported by over 10,000 nodes and processes ~260,000 transactions per day. Although both measurements are short of their Q1 2018 highs, they are down considerably less than the total network market value in USD (Network Value = Price per Unit x Units Outstanding). Translation: Bitcoin is far from dead.
Whether cryptocurrency prices return to their all-time highs is a mystery and, frankly, irrelevant to everyone other than speculators (see: gamblers). The blockchain is still a nascent technology, and there is a large amount of market value available for companies implementing or building business plans around it. This value is estimated to be $3.1 trillion by 2030 according to Gartner Research. With that in mind, more entrants with long-term outlooks focused on use case viability and customer adoption should emerge in an effort to gain market share.
Death of the ICO and the Return of VC Funding
I am being somewhat hypocritical here in declaring a new and innovative form of fundraising dead. Who knows — Initial Coin Offerings (ICOs) could be ahead of their time and, once the legal dust settles, might become practical source of raising capital. This would at least require an endless amount of regulatory approval, a handful of successful decentralized applications, and a wide scale adoption of token-based economies. It is an uphill battle that is improbable in the short-term, but certainly not impossible down the road.
The current market outlook for ICOs is far less optimistic. The funding frenzy that fueled the speculative spike in cryptocurrency prices has since come to a grinding halt. In September 2018, the amount of money raised via ICOs tumbled to $180 million, marking a 93% drop from its peak. [Note: The only outlier in this group is EOS, which raised over $4.1 billion throughout its year-long ICO ending this past June.] The waning interest in ICOs is directly related to the free fall in cryptocurrency prices. Most tokens launched within the last few years are down over 90% in price from all-time highs, including a large percentage well below their ICO price.
None of this should be surprising. Token generation and crowd sale contracts can be coded within a few hours. Projects needed nothing more than a fancy landing page and a whitepaper littered with buzzwords to win over retail investors. This led to a litany of failed startups, lost capital, scams, and Ponzi schemes (Whatever happened to the BitconnectX ICO?). Most, if not all, of these tokens are unregistered securities and have no reason to hold any sort of monetary value. The purge of these types of blockchain projects is well underway and will continue in the foreseeable future.
Last year, ICOs were named as a possible replacement for traditional venture capital when funding blockchain projects. Ironically, the death of the ICO market has given way to an increase in VC backed blockchain startups. Venture capital investments in blockchain and crypto companies grew 316% in 2018 to $2.85 billion. Whether this recent spending spree is due to a fear of missing out (FOMO) or a tactical approach of waiting for the market to mature and valuations to return to orbit is unknown.
Regardless, most VC firms bring a substantial amount of experience and knowledge when it comes to evaluating startup teams and business proposals, leading one to assume the quality of businesses receiving funding is considerably greater than ICO backed projects. Many of these VC backed companies may fail, with the latest casualty being Basis. But a more stringent path towards initial success and exposure will provide better insight into what strategies are effective and which approaches need to be reevaluated.
A New Corporate Entrant
While a significant portion of blockchain development and innovation is occurring at the periphery, a number of established and revered companies have recognized the potential for blockchain technology and dedicated resources to winning market share. Overstock.com and Microsoft were two of the first recognizable brands to accept Bitcoin as a form of payment. Square has integrated Bitcoin processing onto its payment platform and even received a BitLicense, courtesy of the New York Department of Financial Services, within the last year. IBM has been on the forefront of enterprise blockchain development, with Microsoft and J.P. Morgan starting to establish their presence. Other companies exploring use cases include Maersk, Ernst & Young, AXA Insurance, Walmart, and many more.
The most surprising entrant to announce blockchain support in recent weeks is Amazon. It comes as a slight shock after AWS CEO Andy Jassy criticized blockchain technology last year at its annual re:Invent conference. Jassy confidently proclaimed there are no use cases for blockchains beyond a distributed ledger, which limits the technology’s capabilities. He added that AWS would only build technology due to customer demand and not “because we think it is cool.”
It was an impressive deflection as AWS partnered with R3 — a blockchain consortium of over 200 members — and integrated its Corda platform onto the AWS marketplace a mere five days later.
Jassy, however, was just getting started. The cloud service provider announced its blockchain framework for Ethereum and Hyperledger Fabric in April. The following month, AWS partnered with the massive blockchain incubator ConsenSys to collaborate with Kaleido to simplify and accelerate the process of building production-ready DApps. The partnership resulted in the creation of the “Kaleido Marketplace” that launched this past October. Everything came full circle about a month ago when Jassy announced two new blockchain-based AWS offerings, Quantum Ledger Database (QLDB) and Managed Blockchain, at re:Invent 2018.
Both of these services require Amazon to act as a trusted intermediary. The irony was not lost on the blockchain community. Nothing angers the crypto-anarchist crowd more than introducing a “trusted” centralized authority to manage what is claimed to be a distributed ledger. And this backlash is not without merit. AWS acting as the sole gatekeeper for these frameworks creates a single point of failure, threatens inclusiveness and user data rights, and reintroduces value exchange inefficiencies. These pain points exhibited by current tech stacks were the driving force behind the discovery of the Bitcoin blockchain. On the surface, it appears that Amazon is living in the past and stunting advancements in the space.
The AWS approach is not revolutionary, but its services may help stimulate use-case exploration and blockchain adoption. Ethereum-based applications still suffer from a high developer learning curve and sub-par user experience. And sub-par is a very generous description because I’m biased. AWS now offers almost a Ben & Jerry’s level of platform flavors (25 to be exact) to appeal to developers from various backgrounds. Moreover, the Kaleido Marketplace plug-and-play protocols and tools claim to eliminate “80% of the custom code” needed to build a blockchain project. Therefore, it might be fair to assume that Amazon could interest a wide variety of programmers and entrepreneurs to join the space and try their hand at constructing a DApp.
Will Amazon’s custom blockchain services be a long-term success as is? I don’t know. The latest reports have been spelling doom for enterprise or permissioned blockchains, known for dismissing the use of a cryptocurrency, as they are failing to achieve actual adoption. Companies seeking blockchain solutions have come forward saying they see more value in open, permissionless platforms. These same companies are also finding permissioned consortium blockchains difficult to manage without a financial incentive for maintaining a server to secure the network. Regardless, Amazon has the potential to expose numerous developers to the possibilities of the blockchain and bring a wealth of new ideas and innovations into the space. This alone will help push blockchain technology forward, especially in terms of implementation and user experience.
So What Now?
The easy ICO money is gone, but there is still plenty of opportunity. Even sports teams like the Philadelphia 76ers manage to work their way back to favorable win-loss records. What fuels reversals like this is years of developing and investing in talent and infrastructure — and, of course, being gifted the opportunity to sign the best athletes leaving college to enter the professional ranks (In the NBA, the teams with the worst records receive the best odds of winning a high pick in the annual NBA draft). Emerging technologies will not likely have the luxury of spectacularly failing year after year while being rewarded with potential top tier talent. Therefore, progress now rests on the backs of those already invested (with either time or money) in the greater blockchain and crypto community.
There are a lot of technical questions that need to be answered regarding base layer platform scalability and the potential of second layer solutions. The process, however, is going to require building a supportive infrastructure that extends beyond technological capabilities. These include the economic role cryptocurrencies may play, the business applications that will evolve, and, perhaps most importantly, the future regulatory landscape.
While over-exuberance is often dangerous, being overly pessimistic can be as unhealthy and stifle progress. It is safe to assume any industry that sees extraordinary growth is susceptible to a sizeable pullback. But this period of consolidation is necessary for future growth and long-term success. It will take an entire community from various areas of expertise to push the boundaries of what is achievable. And the interest lost due to the price crash of cryptocurrencies has only opened the door for new entrants and opportunities.