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Blockchain: Hype vs. Fundamentals

Let’s be real: Thrill-factor is a big part of blockchain technology’s appeal. The rollercoaster-esque ups and downs of the 2017 crypto market elicited equal parts angst and unhinged glee. But it’s nearly 2019, and it’s becoming ever more clear that some of those blockchain rollercoasters were built entirely on hype. Sounds terrifying, rickety, and dangerous… no?

Look: Rollercoasters are only thrilling given the assumption that riding one will not kill you. So, too, today’s blockchain projects are only exciting when the proof is in the operational pudding, and when said project offers its token buyers some semblance of security. To echo the sentiments of the most recent crypto piece in Financial Times, “Cryptocurrency exchanges must face up to responsibilities as they mature.” In the current bear market, the only blockchain projects that will secure institutional funding and meaningful partnerships are those that manage to evolve with government regulation and show their operational strength.

So… What Does Your Blockchain Do, Exactly?

While cryptocurrency (like Bitcoin and Ether) still has a ways to go before acquiring the same adoption and recognition as the classic Wall Street investment market, we have seen promising new developments in the blockchain industry this year. Despite the drop in valuation at the start of 2018, the blockchain field has expanded into innovative new use cases — like Lition’s green energy supply project, for example, or Mycelia’s music royalties tool. The beauty of blockchain use cases outside of the financial market is this: These projects have a real, live case study for blockchain at their disposal. Gone are the golden days where a project can get by on hype alone. Here are the days where projects have to actually accomplish something.

First, though, it’s important to understand the evolution that got us here. When Satoshi Nakamoto invented Bitcoin in 2012, he intended to create a stateless currency, unbeholden to any government or bank. In 2015, Vitalik Buterin came along with Ethereum, wherein developers could code and run “decentralised autonomous organisations”, defined by The Guardian as “applications selling their services in exchange for cryptocurrency, and self-managing themselves according to sets of automatically enforced rules dubbed ‘smart contracts’.” Both projects had noble beginnings, and via these projects, some people became very rich very quickly. There’s something rebellious… even punk… about early blockchain projects. As with many vageuly anarchist operations, however, they had a lot of copycats, most of which were all talk.

Among the issues in recent blockchain projects are cost, speed, accessibility… and general function. For example, Lition had a tough time in finding the right blockchain project to suit their use case. The finance-oriented nature of ICON, a chain that connects public and private chains, could not be applied to Lition’s smart contract design. Polkadot, which connects private/consortium chains and public/permission-less networks, was also in the running… until faulty implementation from their developer (Parity Technologies) led their 150m USD worth of funds to be frozen indefinitely. So Lition is run on Ethereum. Unfortunately according to Lition’s CEO Richard Lohwasser, “Ethereum is not a good system… It’s very slow. It takes 20 to 30 seconds to tell a customer whether they can buy energy or not.” According to Coindesk, as a renewable energy supplier, Lition also feels uneasy about the mining process that fuels Ethereum. For some context, as of last February, the nation of Iceland used more electricity to mine bitcoin than to power its households. So Ethereum has problems… but at least it’s not a total hoax.

Security Tokens

Ultimately, Ethereum persists because it wasn’t built on hype — it was built with a solid design… not at all perfect, but solid. Bitcoin persists for the same reason. In addition to actual function, though, how can burgeoning blockchain projects gain trusting investors? Give them something secure.

Traditional utility tokens, generated via an ICO, aren’t secure in the traditional sense. As with traditional equity, they may grow in price… they may not. But they’re sure as heck not likely to grow if the currency issued is based on an unsound project. So savvy blockchain projects are developing security tokens, which, like traditional equity, give their holders ownership rights to the company. Just like stocks, security tokens are derived from tradable assets and are liable to government laws. Not so punk… but pretty reassuring.

One thing’s for sure in this funny money economy: It’s the operationally-sound blockchain projects designed for widespread commercial use that will survive. And if they can provide you with security tokens to sweeten and solidify the deal, even better.

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