A recent Andreessen Horowitz report says crypto is in its growth stage, but critics say the industry is yet to create end-use value.
The crypto space is well over a decade old with more than 5,500 different cryptocurrencies and a market capitalization north of $250 billion. Researchers at American venture capital firm Andreessen Horowitz say the 11-year old industry is in its fourth supercycle with the three previous epochs culminating in distinct developments that have gone on to shape the market as a whole.
In a report issued earlier in May, the VC firm posited that despite the apparently chaotic nature of the crypto market, each previous cycle has proceeded in roughly the same order. According to the report, every new stage begins with a massive increase in Bitcoin’s (BTC) price that triggers renewed interest in cryptos leading to the emergence of new ideas and startups.
However, there is an argument to be made over whether these thousands of crypto and blockchain projects have succeeded in ensuring any tangible value creation for end-users. For some pundits, apart from speculative investments, cryptocurrencies are not useful for much else.
Given that the industry is only 11 years old, some of the criticism may be premature. Seeing as the emerging crypto space mirrors the early days of the internet, the current challenges being posed by trying to navigate the decentralization, scalability and security trilemma may be little more than growing pains for a digital assets ecosystem still in its infancy.
Summary of the three past crypto cycles
According to the report, the first crypto cycle took place from 2009 to 2012 with mining pools and crypto exchanges being the highlights of the epoch. During this period, Bitcoin remained mostly within the confines of the cryptography and cypherpunk community as an elegant solution to the double-spending problem that had plagued previous attempts at digital money.
The ability to transfer value trustlessly — i.e., without the need for a central intermediary — likely attracted many of the early BTC adopters. An interesting piece of Bitcoin history from this period comes from the pseudonymous creator of Bitcoin, Satoshi Nakamoto. Posting on the Bitcointalk forum back in December 2010, Nakamoto discouraged WikiLeaks from adopting Bitcoin after major payment gateways like Visa, PayPal and Mastercard began to deny services to WikiLeaks.
Some in the nascent Bitcoin community saw any association with WikiLeaks as a growth opportunity for BTC. In response to the debate at the time, Nakamoto wrote:
“No, ‘don’t bring it on’. The project needs to grow gradually so the software can be strengthened along the way. I make this appeal to WikiLeaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy.”
The second growth phase between 2012 and 2016 saw crypto begin to permeate the larger tech space. In October 2013, the United States Federal Bureau of Investigation shut down the Silk Road darknet marketplace. Like the Andreessen Horowitz research report details, seeds planted in one epoch tend to drive up some aspects of the adoption seen in the following growth phase. Before Silk Road became a reality in 2011, a Bitcointalk forum poster named ‘teppy’ outlined a proposal to use Bitcoin in a hypothetical dark web-hosted heroin store.
The details of Bitcoin’s association with illegal drug trafficking isn’t the focus here, but it suffices to say that it served to catapult BTC beyond the cypherpunk community. Many developers drawn to the perceived potentials in blockchain technology entered the space and thus came the first wave of altcoin projects like Ethereum.
The initial coin offering mania of 2017 and 2018 was arguably the highlight of the third epoch — 2016 to 2019 — as developers and entrepreneurs tried to convince investors that their project was “the next Bitcoin.” BTC itself also set what is still its all-time highest price of about $19,800 in mid-December 2017. This third epoch saw the expansion of the crypto space beyond the creation of peer-to-peer cash systems into infrastructures like decentralized finance and decentralized apps.
What about actual value creation?
Early on in its emergence, the word “disruption” was almost always included in any mention of crypto and blockchain technology. The premise was that decentralized systems would disrupt several facets of the global business process dominated by centralized infrastructure.
Amid the expanding cast of projects and startups, some critics say cryptocurrencies are only useful as a speculative play — as an asset to hold in the expectation that its price increases in the future. Beyond the premise of the “greater fool theory,” the crypto skeptics believe tokens create no additional value for end-users.
Bitcoin proponents typically counter these assertions by pointing out BTC’s increasing utilization in cross-border transfers. For fees as measly as pennies to the dollar, Bitcoin allows users to transfer value across continents in a matter of minutes when bank wires would normally take days and come with a hefty fee.
The above use case, while arguably being prosaic, takes on a greater significance when viewed in the context of Bitcoin acting as a scarce digital wealth capsule in a time when government monetary policies appear to be wavering. According to the Bank for International Settlements, the offshore banking industry is believed to be worth more than $30 trillion.
Additionally, and despite its price volatility, Bitcoin is the best-performing asset of the decade and is leading the way in 2020 as well. This year, while major U.S. banking stocks are in the red, the largest crypto by market capitalization has printed a 30% price gain for holders.
Within the value creation argument for cryptos comes the need to define what exactly constitutes an acceptable set of parameters for judging the success of a digital asset project. For example, is Bitcoin’s emerging status as a safe haven asset and a convenient vehicle for cross-border transactions not akin to tangible value?
Critics of the reasoning above will point to Bitcoin’s limited scope of merchant adoption, which indeed applies for virtually all “payment” cryptos. Blockchains have so far appeared unable to scale sufficiently to enable broad-based retail adoption. For Jerry Chan, the CEO of TAAL, a blockchain service company, the focus on Bitcoin’s value as a store of wealth has taken away from developing useful payment projects. In an email to Cointelegraph, Chan remarked:
“We haven’t seen a focus on transactions on Bitcoin in the past, because the system in this market has historically been handicapped by limited block size, thus limiting its transactional processing capabilities. Instead, the focus has been exclusively on the monetary aspects of Bitcoin, namely that it is a stateless money, and nothing else.”
What will be the likely highlights of the fourth epoch?
Going by the Andreessen Horowitz report, the crypto space is currently in its fourth cycle and if history repeats itself, the current epoch should take effect following a BTC price gain that would renew interest for the creation of new projects. According to TAAL’s Chan, crypto projects that focus on transaction processing will be the main focus of the current cycle going forward: “In the next couple of years, we can expect to see the transaction processing businesses take center stage,” adding:
“The supercycle that we are now entering will be one where the processors that can handle more transactions, or develop innovative ways to serve new emerging transaction use cases and profiles, will be the ones that earn more share of the available transaction fees, which will incentivize them to continue building and supporting the infrastructure of the network.”
For Thor Chan, the CEO of crypto exchange AAX, the current cycle is going to be all about established platforms coming into greater compliance with regulatory standards. According to the AAX CEO, crypto businesses have been working toward building trust with not only investors but with government agencies, adding:
“It’s about getting security right, connecting to solid custody service providers, deploying market surveillance technology to protect the integrity of the markets, and then there’s the workaround optimising fiat on and off-ramps as well as the practical utility of cryptocurrencies in everyday life. We are seeing advances being made across all these sectors and together they are setting the scene for the next phase of growth.”
In a conversation with Cointelegraph, Emin Gün Sirer, a professor of computer science at Cornell University and the founder of Ava Labs, opined that the current crypto epoch will seek to solve issues neglected by the earlier generation of cryptocurrencies:
“The next cycle will revolve around ‘asset digitization,’ where mainstream financial professionals realize that issuing both physically-backed (e.g., gold, real estate, commodities and the like) and purely financial (e.g., corporate debt instruments, CDSs, etc.) digital assets on blockchains confers enormous benefits. What is needed is an Internet of Finance, where any asset can be issued in a way that captures its unique properties, managed throughout its lifecycle in a legally compliant manner, and traded across the globe.”
Which direction to go?
On the subject of value creation for crypto projects, there is clearly a division between the pundits as some argue that the movement itself has been derailed from its original goals. For Fernando Gutierrez, the CMO of Dash (DASH) Core Group, the cryptocurrency space is losing the plot by pivoting away from building efficient payment infrastructure and focusing on tokenization:
“Payments is a use case that the traditional financial system has not fully solved where crypto can add a lot of value, especially in a world where digital is the only option, and borders are harder limits than they used to be. Everyone does many payments every day, yet many crypto projects try to solve funky problems that only happen when you margin trade a tokenised asset collateralised by a stablecoin that is obscurely backed by fiat money.”
Building efficient crypto-based payment systems will involve finding a solution to the scalability problem. For Sirer, the ability to operate at scale is cryptocurrency’s major challenge, adding: “None of the existing blockchains scale, and to the extent that people claim to scale, they do so by compromising decentralization.”
For TAAL’s Chan, the current issues in the crypto space stem from Bitcoin not being representative of its original purpose as developers agave been creating projects that range from alternative money systems to directly compete with fiat currencies to solving unnecessary problems. According to Chan, a fully functioning Bitcoin negates the need for the entire altcoin market, declaring:
“Altcoins shouldn’t be platforms, they should be applications built on-top-of Bitcoin. But because BTC ‘lost the plot,’ they started off on their own to build a blockchain with each use case. That is equivalent to creating a new internet protocol and payment system for every online application that needs to be developed. It makes very little sense.”
Steven Pu, the CEO and a co-founder of Taraxa, a platform looking to deploy blockchain technology for internet of things solutions, highlighted DApps as an area where the crypto movement is getting it wrong. According to Pu, the insistence of creating completely decentralized platforms is getting in the way of developers creating easy-to-use applications, as he told Cointelegraph:
“DApps will not gain widespread adoption until they offer excellent user experience, which includes performance on par with centralized systems and minimizing exposing users to blockchain’s underlying complexities — e.g., managing private keys. The ‘complete’ privacy offered by completely decentralized systems almost never offer anywhere close to good enough user experience to gain adoption, so some compromises need to be made.”
At the start of 2020, Cointelegraph reported that user retention was still a major issue for DApps. With many apps having difficult-to-navigate user interfaces, projects seem unable to continue directing user traffic to their products.
For Zach Resnick, a managing partner at crypto VC firm Unbounded Capital, only projects able to successfully solve the blockchain trilemma will become dominant in the emerging cryptocurrency landscape. In an email to Cointelegraph, Resnick posited:
“There is utility in being a store of value as well a highly efficient payment system. Further, there is utility in being able to store large amounts of data or perform complex computations. For all of these functions, scale increases the utility. I think scale is highly underrated by the broad blockchain community, and that trustlessness and censorship resistance are highly overrated.”