Blockchain and Crypto: Looking beyond the hypeRelated Practice Area: DLT & Fintech
The dialogue on the subject of blockchain has evolved since bitcoin achieved mainstream notoriety a few years ago.
At the time, markets were told that bitcoin was not blockchain and that the two terms were not to be confused with one another.
The prevailing impression was that there was something sinister about bitcoin and its use case and that such an aspect could impinge on the progress of blockchain in general.
Then came a myriad of initial coin offerings (“ICOs”) and alternative coins issued from all over the world, which led to a period of opposing views on the subject.
On the one side, one could observe the surge in market speculation, with a number of retail investors jumping on the bandwagon looking for a quick profit.
On the other side, institutional investors and regulators were sounding the alarm bells that crypto was a bubble.
Last year’s performance certainly proved them right, with most crypto-assets losing significant value.
Despite the value loss, however, Bitcoin remains the most popular use case for blockchain technology, arguably being the first mover in the decentralized payment sector.
At this point, one gets the impression that although bitcoin is not blockchain, it was the bitcoin whitepaper that appeared to set out the solution for the infamous double-spending problem, thereby paving the way for the concept of ‘money over internet protocol’, and consequently the emergence of everything crypto.
At a very basic level, the double-spending problem can be explained as follows:
When we send photos or other data online, we are essentially sending copies of such data to the recipient. Naturally, with money, this becomes an issue, as sending a copy completely nullifies the concept of ‘transfer of value’.
Solving the classic double-spending problem through the "proof of work" protocol meant that, when an IP address purports to transfer value to another on the bitcoin network, it would appropriately debit the payor account and credit the payee account. This process is oftentimes referred to as transaction verification.
This significant breakthrough has inspired a goldrush of entrepreneurs seeking to decentralize the manner in which we acquire a number of goods and services, in the process introducing markets to a number of crypto-assets, the vast majority of which being financed through ICOs.
Considering the performance of most crypto-assets, it can be argued that this gold rush has created a hype that has severely weakened the outlook of blockchain and crypto-assets in general.
There is also room to argue that the role of retail investors in crypto-assets should be limited and controlled. The world is still in the process of discovering the true potential of this technology, and risks arising from retail investor speculation can skew or delay the discovery process.
Markets were told that blockchain is internet 2.0, but for it to meet this level of expectation, it must be allowed to evolve organically without undue hype or expectation.
Entrepreneurs, together with their backers, should focus on adoption as the single most important metric when shaping a prognosis on the future viability of the blockchain.
Just like venture capitalists and angel investors look at the daily active user base of an online business when ascribing value to it, the same principle applies when entrepreneurs purport to decentralize a service or product offering.
Above all, retail investors would be well-advised to limit their involvement to a genuine use case, as opposed to mere speculation. In this scenario, if there is a service or product of interest, or perhaps a business with intrinsic value, then there is scope to acquire the crypto-asset, and perhaps transact with it at the opportune moment, as opposed to purchasing a crypto-asset hoping that one day it will be worth more than what it was acquired for.