When token markets plunged in 2018 following the initial coin offering (ICO) bubble, I wrote a column entitled “Crypto Winter Is Here and We Only Have Ourselves to Blame.” It lamented the get-rich-quick schemes and “lambos” that took precedence over the development of real solutions to real problems at that time.
Four years later, with crypto markets reeling from another sharp sell-off, I feel no compulsion to write such a self-flagellating piece on the industry’s behalf.
Sure, last year’s boom generated overblown prices for many tokens, both fungible and non-fungible, alongside a whole new set of bad-taste, wealth-flashing memes. (The phrase “have fun staying poor” surely took the prize as the worst.)
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But in many ways the building and problem solving that followed the 2018 meltdown has served us well. It meant the speculation behind the most recent boom was built on a more established foundation than in 2017.
Crypto is still far from going mainstream, both in terms of its technical capability and social acceptance. But there is a lot less “vaporware” now. It feels more “real,” established, here to stay – that it truly is building something transformative for the world. That’s why this “winter” feels less brutal.
So, with that in mind, here are my six main reasons to say “this time is different” (which, I know, is always a dangerous thing to say).
Layer 2 scaling systems: No longer just an idea
Whether it’s the Lightning Network for low-cost bitcoin payments, the ZK-rollups that power decentralized finance (DeFi) applications or multiparty computation projects enabling secure online custody, cryptographic advances have over the past three years gone from concept to deployment.These innovations will lead to the network processing scalability that’s needed for blockchain technology to go mainstream.
Most of these are layer 2 or companion tools that address a core problem with multi-node blockchains: the need for a massive amount of duplicative computation to process transactions on chain. They represent decentralized alternatives to “permissioned” blockchains where only a small set of approved actors would have the authority to validate transactions (thus improving efficiency). Instead, Layer 2 mechanisms use clever cryptography to enable off-chain computation that can’t be gamed and which, after linking outcomes back to a “permissionless” blockchain, don’t undermine its decentralized consensus. If Ethereum developers can successfully migrate that blockchain to the full suite of 2.0 features, even bigger scaling gains will soon be made by the crypto ecosystem.
Permissionless models are winning
Thanks partly to the technological improvements described above, recent crypto success stories are concentrated among permissionless projects open to any participants, rather than in the permissioned projects once favored by incumbent players. The money is being made in DeFi, non-fungible tokens (NFT) and decentralized autonomous organizations (DAO), not so much in IBM’s once prominent “enterprise blockchain” offerings.
Users are finding value in blockchain technology’s most disruptive, paradigm-changing promises rather than in incremental adjustments to existing business models. This reflects hope that it will unleash a truly transformative wave of innovation, something closer to what the internet achieved than most fintech ideas seem geared toward.
Corporates and financial institutions are here now
This preference for permissionless crypto projects is not just coming from crypto-native “degens.” It’s also found among the same kinds of established companies that were earlier the target of permissioned enterprise blockchain ideas. Thousands of mainstream firms are experimenting with NFTs and social tokens, especially those in entertainment, fashion and media such Adidas, Warner Brothers and The New York Tiimes. One mark of what this says about the sector’s future growth came in separate earnings calls this week, when Satya Nadella and Tim Cook, the CEOs of Microsoft and Apple, respectively, both crowed over opportunities in the metaverse and pledged to invest forcefully in it.
Meanwhile, even though lots of institutional investors have no doubt pared down their bitcoin positions these past couple of weeks, the engagement in crypto among hedge funds, family offices and even pension funds surged last year – with the more adventurous of them dabbling in DeFi. Even if they’ve sold a lot of crypto of late, institutions’ investments in the technology, staff, processes and legal arrangements needed to enable those investments now stand as a base of established infrastructure for handling future transactions. The institutions aren’t leaving.
Regulation implies normalization
While the crypto community was understandably upset by some poorly worded amendments to a U.S. infrastructure bill that resulted in overzealous tax surveillance of crypto service providers, the law also effectively legitimized the industry. If a government wants to tax a sector, it won’t kill it. It was also encouraging to see wide bipartisan support for the (ultimately failed) efforts to soften those amendments, along with other signs that lawmakers are becoming better informed.
Regulation remains a barrier to innovation, adoption and growth, particularly the onerous nature of anti-money laundering rules and securities law enforcement. But it’s also a framework for normalizing the industry and for making the general public feel more comfortable with it.
This wasn’t (all) crypto’s fault
The mad 2017 token price runup and subsequent collapse in 2018 was largely endemic to the crypto sector. It was stoked by investor mania for ICOs and by blind belief in the untested ideas of founders who raised billions of dollars on flimsy white papers. The inflated prices for this vaporware inevitably deflated when doubts about their promises grew.
The current situation is quite different. While excessive enthusiasm for new tokens contributed to unsustainable price rallies, crypto’s ballooning market capitalization was also fueled by unprecedented fiat monetary expansion as central banks pumped trillions of dollars worth of quantitative easing into the global economy to soften the impact of a pandemic-fueled global recession. That surfeit of dollars, euros and yen flowed into risk assets: stocks, commodities, real estate, fine art and, significantly, cryptocurrencies. Now we’re all paying the price for that as an inevitable inflation problem is prompting the U.S. Federal Reserve to remove the punch bowl.
With good reason: Crypto’s concurrent collapse with stocks and other assets led some to question the claim that bitcoin is an uncorrelated asset and a hedge against inflation. But I think the excessive part of the crypto price rally – the part that took bitcoin from $30,000 to $65,000 but not that which drove it from $10,000 to $30,000 – was perhaps due to exogenous factors.
Once prices settle, we should be in a better position to gauge how much of their future advances will be driven by legitimate crypto-only factors such as those described in points one through four, and how much is caught up in the risk-on/risk-off whims of a global financial system addicted to central bank largesse.
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