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What Does the Crypto Crash Mean for Blockchain in 2019?

By Matthew Hine

No less than the NY Times has proclaimed that after a year of “frenzied easy money and a fantasy of remaking the world order with cryptocurrencies and … blockchain”, 2018 was the year that “the whole thing collapsed”. So with the crypto crash and cryptocurrencies trading at around 10% of their peak price, is blockchain technology a passing fad?

Hardly. It’s just getting started.

Blockchain Changed the Rules, Messily

One of the unique and critical features of the first blockchain, Bitcoin, is that it is self-incentivized: people running the network of computers needed to support Bitcoin are automatically paid by the network itself for their effort, in Bitcoins. In one form another, this is a necessary feature of every public blockchain network, and it means that buying the native cryptocurrency of blockchain works as an investment in the success of that network. Setting speculation aside, if the demand for the network goes up, the value of its native cryptocurrency goes up. Businesses quickly realized they could apply the same direct investment model to fundraising for their blockchain-enabled application and the ICO was born.

For the first time in history, anybody could invest directly in a new technology. I want to emphasize just how thoroughly bizarre this is. Let’s get a little bit of historical context. For decades – arguably centuries even – this is how things have worked:

Traditional Model.png

Fast forward to the late 90s. During the dot-com mania, we were so excited about the Internet that we ignored just step 3 for a while:

Dot-com Model.png

Remember that by this point the internet itself had a couple of decades of maturity as a fundamental technology. But so much hype rapidly grew around internet-based companies that we entered a phase of rapidly appreciating IPOs before the companies themselves had become viable. And we saw what happened then in 2000 when we realized that not all of these companies made sense: panic and generalized market crash.

Now with blockchain and cryptocurrencies in 2017, leading into 2018, we cut out not just one step, but everything between the tech and investment:

2017 Blockchain Model.png

For most companies conducting ICOs in 2017, the ability to take money via a cryptocurrency that is linked (in concept at least) to their blockchain-based business allowed them to take money entirely based on the speculative prospect that they might build something wildly successful. And they were taking that money from anyone and everyone in essentially unlimited cryptocurrency-enabled ICOs – not just qualified investors as in the dot-com IPO hysteria.

This was not a recipe for rational growth. Instead, these quick-turn ICOs were like combining a global, open-source research project with the worst parts of the Kickstarter crowdfunding craze and a completely uncontrolled stock market bubble. As a result, cryptocurrency prices reached levels utterly dissociated from any underlying value, projects failed to deliver, fraud proliferated, and the SEC – created specifically to stop this kind of thing from happening – stepped in. Speculators cut their losses. Cryptocurrency prices universally spent 2018 progressively crashing further and further.

Implications for Blockchain in 2019

But what does a crypto crash say about blockchain technology itself? Very little. Cryptocurrencies and blockchain are not the same thing. The crypto investor market – hardwired into the tech of public blockchains and frictionlessly available to everyone – simply got way, way ahead of itself. Just as the Internet, post dot-com bubble, has since proven itself to be a technology of boundless transformative power, the excitement for blockchain remains entirely warranted.

If fact, in a way, 2017’s crypto bubble and 2018’s crash was rather messy but irrefutable proof of blockchain’s tech fundamentals.

What is blockchain technology good for? Technology details aside, blockchain is extremely good at efficiently and securely representing assets, transactions, and relationships between people. The first proof of this? Say what you will about Bitcoin’s price level, but its network has successfully delivered a fixed asset – digital cash – on the open internet. The second proof? The blockchain ICO investment bubble happened using the tech itself – not stock exchanges and broker dealers and all the expensive and complex systems we’ve needed up until this point to conduct global public sales of company shares. It wasn’t correctly regulated, but it definitely worked and was a lot more efficient than what was possible before. And that’s just one application for the technology – far from the most interesting and important one.

So with at least one significant round of market hype behind us – 2019 must be the year that the hard work begins. With the easy money no longer available to the lazy and the fraudulent, that hard work will have to justify itself the old fashioned way and will carry real value. The business ecosystem for blockchain (which I expand more broadly to “DLT”) must mature to look more like this:

2019 Blockchain Model.png

Getting to this level of maturity means work in the following areas:

  1. Blockchain technology (DLT) must improve. If we compare the ambition of blockchain to its current iterations, it’s clear that we are far from a point of maturity – far even from a point of “good enough” for many applications. Transaction rates on decentralized public networks are low. The current smart contract development paradigm is fragile and unwieldy. There are some technology bright spots and ways to work around these limitations, but they remain true limitations to the technology’s potential. We are still at the rapid evolutionary phase – not the maturity point of the internet in the early 90s. Better DLT is on the horizon.

  2. Software stacks need to be complete. The ecosystem is just starting to awaken to the fact that businesses will not build directly on blockchain and smart contracts. As with every previous breakthrough technology, there must be mature layers of middleware to make a complex technology accessible to businesses, governments, and other organizations that want the benefits of the tech, but not highly specialized developers and long risky custom developments. (Solving this problem is He3Labs’ mission in 2019 with our Threshold middleware solution.)

  3. Businesses need to begin truly building and delivering using the above. With better DLT tech, more complete software stacks, and a more vibrant and proven tokenized funding ecosystem, companies can finally get down to business. Simply announcing blockchain trials, research projects, or partnerships will no longer suffice. DLT can finally start providing true, tangible, transformative benefits in the real world.

  4. Tokenized funding needs to become compliant. The hunger and value of more democratized funding has been proven by ICOs, but it can’t be at the expense of putting the public at risk. STOs offer the potential to thread the needle, leveraging blockchain’s benefits to issue and regulate securities more efficiently and correctly than has been possible before, while safely offering greater flexibility for companies and investors. The STO ecosystem is currently embryonic at best however. Consider this a blockchain application itself that needs the same 4-step process as any other.

The stage is set for a truly exciting 2019 for blockchain, DLT, and those that keep their eyes on the technology and its applications, rather than on the price of Bitcoin. He3Labs intends to be right in the thick of it.