Assessing Children of Blockchain: Cryptocurrencies vs. ICOs

By James Dix Wall St. Village Archives

Which child of blockchain technology will markets ultimately love more, cryptocurrencies looking to be stores of value, or initial coin offerings (ICOs) looking to fund new digital services? In crypto, Bitcoin prices have been increasingly volatile, bigly affected by hostile actions by the Chinese government, feeding into a bear thesis that governments will ultimately make life difficult for stateless currencies. Although the rising wave of ICOs has swept past the bubble question for now, many ICOs may lack what leading cryptocurrencies have, a niche of buyers who want to hold, and not simply trade, the coin. ICOs of "utility tokens" with high "velocity" -- that is, proportion of flippers into fiat currency relative to longer-term holders -- could be setting themselves up for big valuation downdrafts down the road, with even some crypto purists skeptical of their value.

With this backdrop, a daylong event last week hosted by NYPAY had more bullish nuggets for ICOs than crypto. Although the regulatory status, benefits and burdens of ICOs are still evolving, ICOs seemed to capture the interest of the attendees more than cryptocurrencies. Attendees noted the billions that have been raised by ICOs to fund ventures addressing problems across a wide range of industries, including media, in contrast to the still questionable use cases for the dominant cryptocurrencies like Bitcoin and Ether.

Because the foundation for crypto and ICOs is blockchain technology, a good bit of the event explored what that technology entails. Blockchain ledgers create new "computers," more than new databases, with the potential to create new markets in a range of industries.

First, the history of transaction ledgers on computers has proceeded from one copy of the ledger, when computers were expensive, to the distribution now of many copies of the ledger to different computers. Consider the fair approximation that a modern mobile phone has the capacity to store all daily U.S. credit card transactions. This reality lies at the core of the potential of the distributed ledger.

Second, the blockchain operates across this shared ledger via "contracts" -- i.e., shared ledger applications--, which allow events to trigger actions on the shared ledger. The three key elements of this shared ledger, aka consensus computer, are: 1) "consensus" regarding the immutable record of transactions, 2) "content," namely the kinds of assets that will be in the transactions, and 3) "communications," defining which entities create and propagate transactions. One important intuition is that there are likely to be slightly different copies of the ledger across all the computers with access to it, certainly in the case of a public ledger. For example, this could occur if some of the computers were offline when transactions were entered onto the ledger. This necessitates rules for communications and consensus determination to settle on the contents of the ledger.

Third, a blockchain ledger comes in not one, but four, fundamental varieties. A "double permissionless" public ledger allows anyone to use the ledger, which provides rewards on the ledger to users for maintaining the integrity of the ledger. The other type of public ledger is "permissionless," whereby anyone may use the ledger, but the rewards given for maintaining its integrity are provided off the ledger. A "permissioned" private shared ledger may only be used by a selected group, with all group members maintaining the ledger's integrity. Finally, a "double permissioned" private shared ledger has its integrity maintained by privileged group members.

Onto the blockchain, enter ICOs, a new market for venture financing, which potentially achieves much of what legacy financial markets achieve, but at a lower regulatory cost. In this sense, use of the shared ledger for ICOs is a "regtech" more than a fintech.

Some speakers saw ICOs as having greater potential implications across a range of industries than cryptocurrencies. Now, recognize that many of the presenters and participants, hailing from legacy financial institutions and vendors thereto, were perhaps naturally more skeptical about crypto.

Although crypto is both an asset and a currency, its dominant use case to date has been as a speculative asset class. The slow general market adoption of crypto indicates that crypto is an asset much more than a means of facilitating transactions. Payments conference execs were skeptical of the value being attributed to crypto, which has made relatively little progress in becoming a functioning currency, at least for those outside the black market. The flurry of new cryptocurrencies was seen as unlikely to facilitate making payments. Leading cryptocurrencies lack killer apps. There is little adoption of Bitcoin for conventional currency purposes. Of Ethereum's nearly 100 applications, none yet appear particularly groundbreaking. 

Given this crypto cynicism, the bullish takes on ICOs from execs from legacy financial institutions were surprising, with implications for insurgents in media and elsewhere. ICOs have already raised funding this year for many media ventures, ranging from advertising to content monetization. Some investors are actively looking to diversify beyond pure crypto to utility tokens. Through ICOs, expect continued diversification of investment beyond cryptocurrencies to the much wider set of use cases to which the blockchain ledger may apply.

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