In this opinion piece, Deschapell examines the burgeoning blockchain token ecosystem, arguing that it's perhaps best viewed as a continuation of the market discovery an invention like bitcoin necessitates.
After a historic cryptocurrency price run-up, a question continues to hang in the air - is there a larger correction looming?
To examine this question, we must first look at the drive to a $100 billion cryptocurrency market capitalization, and the factors that created it - these include the countless initial coin offerings (ICOs), ether's rapid price escalation, and now, the possible (maybe imminent) activation of Segregated Witness on bitcoin.
First off, it's best to restate that many commentators have observed the number and size of such ICOs, and the perceived speculative greed driving them, and have raised the alarm.
Perhaps the project that's most symbolic of the bubble for those in this camp is Tezos, which recently broke crowdfunding records by raising $232 million with little more than a white paper and a website.
Defenders will point to past bull runs, which also had their own alarm-raisers.
Here, I'd like to point out a single important and little appreciated difference: In every prior bubble new capital was coupled with an inherent skepticism of the technology and industry itself.
This has undoubtedly changed.
Today, there is little if any talk of the inherent instability of cryptocurrency growth, or bearish outlooks on its long-term future by critics.
Instead, all we are seeing are simple and reasonable conclusions that perhaps the recent influx of capital occurred much too quickly. Blockchain and blockchain tokens, however, are increasingly recognized as permanent fixtures of our world.
While the change in rhetoric has been subtle and gradual, we are actually experiencing a significant shift in the mainstream perception of cryptocurrency.
The value of public blockchain networks is, for the first time, being implicitly admitted by the financial status quo, who seem to be collectively accepting cryptocurrency as a new asset class.
The tune and actions from major industry players in 2014, like Goldman Sachs, was drastically different. Rather than just performing research on the technology, and dismissing it, we are now seeing cryptocurrencies themselves becoming the next target of hedge funds and other investment vehicles.
In 2014, the question was whether public blockchains and distributed cryptocurrencies were here to stay. That has been answered.
Where we're headed
Yet, there are endless more questions that necessarily follow.
What blockchain architectures are most secure and useful? How secure do they have to be? How many different cryptocurrencies are necessary or practical? How should they be implemented, and which protocols will actually stand the test of time?
These are all questions to which there are plenty of competing answers.
It's no surprise then that ICO investors are betting on every possible configuration of the technology, as it's a puzzle to extreme specialists, let alone the average person, how this will all play out.
The cryptocurrency industry finds itself at a formative point, and the growing pains will involve individual price corrections and many more individual failures and short term volatility.
But all the while, the ecosystem is in the midst of building crucial infrastructure. Most importantly: the knowledge foundation and market confidence in what works and what doesn't.
This is not in spite of the inflated short-term valuation of ICOs, but in fact in large part because of it.
Yes, many ICOs are likely to fail.
Given the unprecedented nature of cryptocurrency and novel dynamics of the ecosystem, it's reasonable to assume also that their failure rate will be much higher than that of even the typical tech startup. But just as no rational and professional economist considers the failure rate of new startups a problematic market failure, the likelihood that many ICOs will fail is not an issue for the ecosystem.
To the contrary, it's a positive and essential step to building the foundational knowledge and and market confidence that the cryptocurrency industry needs in order to continue to become established. Just as miners maximize their profits to secure the bitcoin blockchain, traders too attempt to optimize returns, and by extension, add long-term value to ecosystem.
Although, how they do this may not be immediately apparent. Without trial and error, there can be no collective learning and ultimately no economic growth.
Rather than careless and naive boondoggles, recent ICOs can instead be viewed as both a bullish investment in, and broad insurance for, the long-term future of public blockchains. There are many disagreements as to how that future could look like, and thus capital is naturally being funneled into various competing visions.
But this isn't a sign of a market with fundamental long-term problems. It's a sign of a market with a robust future not riding on the success of any single project, idea or team.
Those most likely to scoff at this perspective are self-proclaimed "bitcoin maximalists" who are supremely confident of the superiority of a single blockchain solution in the long term (naturally bitcoin, albeit with sidechains and additional protocol layers to extend usage and functionality).
Still, even if maximalists are indeed correct in their assumptions and long-term projections, the market can't and won't follow them to their conclusions until it has attempted many different courses of action.
Like the living things they are extensions of, markets operate and learn solely through feedback. It's only through competitive trial and error that market hypotheses and theories are vindicated or discredited. It's by this mechanism that the most accurate mental models of the world come to be validated and shared collectively as common knowledge, as the economist Friedrich Hayek helped to so brilliantly articulate.
This is the most important function ICOs provide: validating what works and what doesn't and guiding the ecosystem's development as a result.
Seeding the earth
In other words, let a thousand ICOs seed the Earth.
The benefit of the increased diversity and competition that follows is a higher rate of experimentation and learning, at the cost of temporarily added market noise, confusion, and volatility. These are costs which are best incurred by the ecosystem as early as possible, and for cryptocurrency this is still only the nascent beginning.
We'll continue to see individual ups and downs and wins and losses. But in the meantime the necessary intellectual and technical foundations are slowly being solidified to make for a much larger impact on the global economy.
From here many different futures are possible.
The new blockchain protocols which seek to improve upon bitcoin or solve problems it leaves unaddressed may all ultimately fail, and simply leave a more dominant and validated bitcoin vision than ever. Or some may succeed and create real value in the medium to long term, and perhaps even compete with bitcoin if they are able to solve even a subset of the ambitious problems many of them claim to.
While high levels of skepticism for new ICO projects are warranted and absolutely needed given the almost non-existent barrier to entry, you can never eliminate the possibility of a new real innovation appearing out of nowhere, just as bitcoin itself did.
Regardless of the outcome of the current mania, and the exact mix of winners and losers which appear, the only thing that can be said for certain is that the cryptocurrency ecosystem as a whole can only come out of it more confident and established than ever.
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