Disclaimer
(This is a copy of a post I made on Medium: https://medium.com/@tkktkk/blockchain-mass-adoption-will-be-painful-f94a816e8b6f)
I am stupid and therefore, I write stupid stuff, which basically means that for one, I could be off by a lot in my assessments and for another that I present things as great revelations, which are absolutely trivial to most people. But since this is the Internet and I can choose not to use my real-life identity, I decided not to care.
Also, when I say “token”, I generally mean all digital assets, including cryptocurrencies such as Bitcoin. It’s just easier. Also, English is not my first language, so errors are to be expected.
Preface
To fully dive into this post and get the general points, I think I have to explain some basic assumptions I am making:
There are two distinct types of people using blockchains: speculators and users. Speculators generally have no interest in actually using a token for what it is supposed to do, but see it as a means to earn more money. Users want to use the system and see tokens as a means to do so. They generally have no interest in the current value of a token, as long as it doesn’t affect the usability of said token. Obviously, these are two extremes that more often than not mix in some way, be it because the token itself provides a use case which is value based (such as store of value, currency or whatever), or because the speculator/user is actually interested in both ways to use the token.
Mass adoption of blockchain- and tokenbased economies will be painful.
Right now, we are in a speculative bubble. This is basically general knowledge. Everybody is aware that apart from the sporadic use as currencies and stores of value, almost no blockchain implementation has any relevant real-world usage yet. This had be clear to everyone, including those who were adamantly stating that the last bullrun wasn’t a bubble. Their hope must have been that at some point, mass adoption would kick in, which would have replaced the speculative value by a functional value: instead of betting on future functionality, real-world functionality would determine the price.
This has been a nice idea, but it wouldn’t have worked out. First, let me state that I am a strong long term believer in blockchain technology. I think we will eventually find out that we shouldn’t use it for everything, as the current mood seems to suggest, but I am pretty sure that there will be use cases, including use cases outside of purely monetary or store-of-value functionality. At some point, the masses will come. Now, the masses will probably not understand how it all works, they will probably not even realize that they use blockchain technology, because their device/app does everything for them. This opens the door for a giant slew of “No really, I am a blockchain, that means I am great” snakeoil projects. I won’t name names, but it has already started. This is a whole problem by itself and I might write another post about it, but for now, this is not what this post is about. For now, let’s assume the “good guys” win. We have actual working blockchain technology reaching the masses. People, or much rather companies and therefore their customers start using public blockchains. All the fancy projects which were working on, let’s say, enabling a decentralized Internet, or let your car pay for parking, will get adopted by the users. Great, right? Well, on one side, yes. This is what this was all about. There is no way around it, you can’t keep up a speculative value indefinitely. But on the other hand, and especially when you are in it for the money rather than the tech, this will be a painful experience. And most likely, it will a painful experience for just about everyone who has money in this. There’s three main reasons for this.
The first issue: too many projects fighting for the same piece of the pie
The first one is that there are a lot of projects out there, trying to solve the same problems. The speculative value of an existing project is loosely based on a value projection of the current market situation. Let’s say, a project is working on cloud storage. There are current and future projections about the size of this market and the current speculative value of these projects will be somewhat based on these projections. Now, obviously there will be other influences as well, markets tend to do weird stuff to the value of an asset. However, these projected values tend to dismiss the existence of competitors. Let’s keep in mind that all projects working in this field are not yet widely used by any stretch. The value which they currently hold is purely speculative. There is no overlap between the future “usage-based” marketcap and the current speculation-driven marketcap. This means that once mass adoption sets in, there will be a transitional period between these two marketcaps. During this time, due to network effect and other factors, few projects will likely turn out to be the “winners”, while others will have no user base. The speculative value will diminish over time, when it becomes clear that users prefer a different solution. Lots of projects won’t survive this and many speculators will get burned. Another, yet less possible scenario would be users evenly spreading over the existing projects. Suddenly it becomes apparent that their speculative value was based on an assumption about the market which did not include the existence of other projects. The market will realize that their actual market share is only a fraction of what they assumed and their value will adjust downwards. The real future will probably somewhere between those two scenarios.
The second issue: mass adoption doesn’t happen over night
Now, even this still sounds like there is money to be made. Suggesting you are either well informed or extremely lucky, you might still be able to pick just the right projects, the ones which will make it in the end. Congrats, right? Well, not so fast. Let me introduce you to the second problem: mass adoption doesn’t happen over night.
As stated earlier, there is most likely going to be a transition between speculative and functional value. Once people start using a project, the value will be determined by its usage. This is not an absolute, there will still be speculation involved, but all in all, if we look at speculation as a use case, the existing use case will be replaced by another. The problem is that more likely than not, this transition between the two states will not be in sync. There will be offsets. Because, here’s the thing: almost nothing gets mass adopted over night. The speculative value is based on a potential future value based on mass usage. It doesn’t account for the time it takes to get there. If a projects value is based on a potential usage by let’s say 10 million users, what do you think will happen to its price when it turns out that it’s only used by 100,000 users? It might get to 10 million users eventually, but it sure won’t start there. When speculators start to sell their tokens to the 100,000 users, tokens whose value was based on a 10 million user base, there will be great downward pressure on the market. Barring the unlikely case that most speculators will hold back their tokens, supply will outweigh demand. Even if a project actually has merit, even if it is the one that is winning the race in the long run, it will most likely tank significantly, once the transition sets in. Hello speculators, welcome to a world of pain.
The third issue: the race doesn’t care if you are a bird or a fish
The third problem is based on overall market sentiment. The 2017/18 bullrun was purely based on speculation. There were no acute signs of mass adoption, nothing which indicated that this would be the time blockchain projects would be finally reaching a mass market, at least not instantly. Can we expect a second altcoin bullrun like this one, driven by pure speculation? And if not, what will trigger the next bullrun? Even if the next bullrun is based on speculation as well, eventually, this trigger will wear off and the next big mass market movement will be triggered by the start of mass adoption. And more likely than not, this will affect everything labeled “blockchain”. But blockchain within itself is not a homogenous technology. Let’s say, blockchain based cloud storage is market ready and is being mass adopted, but other blockchain based services are not, like your car paying automatically for parking and gas 8not that I think this is going to be a viable use case, but maybe it will). Even though the technologies and fields are not directly linked with each other, the fact that they all use blockchain technology somewhat links them in the minds of speculators. The question arises why one technology is adopted, but another one isn’t. This doesn’t necessarily indicate that one use case has merit and another one does not, but it might look like it. I am unsure about how this might play out, especially with the above issues in mind. Do we expect investors to drop not yet used technological fields in favor of used fields? Can we expect unused fields to hold their value better, because they are not pressured by the above issues? Hard to say.
Conclusion
For a lot of people involved, speculation is a mayor part of blockchain technology for now. I don’t expect this to go away anytime soon, but as a speculator/investor in the space, one has to be very conscious about the current state of the technology. And contrary to the overall sentiment, mass adoption will not be the happy fun land for speculators which they seem to expect. In fact, at least for a period in time, it will be the exact opposite. Until then, speculating on digital assets which suggest future usability is a greater fools game at best.