Despite the recent ICO boom (which I’ve observed as “bubbly” in my last blog post), some of the biggest critiques of blockchain technology are still unresolved:
- Near 100% of the current crypto market cap is speculative value rather than utility value
- This is not likely to change in the near future because blockchain technologies are hammers looking for nails
The argument is essentially that blockchain applications don’t address a compelling pain point for the end consumer in a new way. Centralized systems work a little less elegantly and create giant walled gardens, but they do a fine job of solving consumers’ pain points, so why would an average consumer switch? In other words, what is the point of decentralization for decentralization’s sake?
If you scour the blockchain space for new, blockchain-only use cases, like I did, you’ll come back relatively empty handed with the exception of some edge cases like prediction markets or platforms enabling the long tail of content creators.
However, what if the answer’s been right under our noses the whole time: what if it is for decentralization’s sake?
Instead of fishing for a future application solving a future consumer pain point, observing how Bitcoin, Ethereum and the hundreds of other tokens have been adopted shows the same pattern:
Initial investment due to speculation or alignment of ideals -> Emotional commitment to the growth of the network -> Adoption -> Advocacy
(It’s important to note that investment can mean investment of time mining and earning tokens as well as financial investments)
There are so many signs pointing to investment as the first use case that we previously ignored because we just labeled it all as early speculation. The first applications are wallets and exchanges; the average “crypto” person also has a significant percentage of their invest-able wealth in tokens; and there is very little utility value in most tokens except for the expectation of future value creation. The continuous speculative adoption of Bitcoin has so far been proven correct:
Before, users only switched over to an internet application if the functionalities were better (because that’s all they had to gain)now, they switch because they own a part of it and the value of their ownership grows the more they and their friends use it. This is a much more compelling reason to adopt new technology, even if there is no feature parity, even if the UI sucks, and even if they have to remember 64-character cryptographic hashes.
The value prop to adopters of new technology used to be limited to only having their user pain points addressed in a better way (and whatever coolness factor comes with telling their friends about it first), which is why, as VCs, we are so used to only looking for user value proposition in the traditional sense, driven by slick onboarding funnels, library completeness, etc., and the bar is much higher thus it is true that most blockchain use cases don’t deliver a differentiated value prop on that one dimension. However, in the decentralized world, adopters of new blockchain technologies can actually make money while the network is growing by earning or investing in tokens. This psychology is unexplored territory. It taps into highly motivating human forces such as greed, the need to be right, and tribal thinking. Imagine watching your bank account grow the more Snaps you create and trying to convince your friends to dump their “instacoins” in favor of “snapcoins”, which are appreciating much faster as more users start posting on Snapchat. Direct financial incentives take advocacy and loyalty to a whole new level, as witnessed by the existing crypto communities and how fervently they hold certain beliefs. There’s been some really interesting writings on tokens as a coordination mechanism by the likes of Maciej and Simon, but none applied specifically to driving adoption.
The above logic works for early adoption with speculation, but at some point, as the growth of the network slows, the later adopters’ utility will be less tied to tokens, as price appreciation slows, and more based on traditional user value props, so the blockchain application at scale needs to become at least as good compared to centralized substitutes in the future (or people have to believe it will get there for this whole thing to work). As many critics rightfully point out, the value exchange equation in media, at scale, don’t generate enough monetary returns for the end user for them to care (pocket change per day).
There are some obvious questions to this hypothesis, the first being whether or not early-adopter behavior can be attributed to the average user, specifically around the leap from investment to usage, and honestly we don’t have enough proof of that yet. Current token investors will actually need to start spending their tokens at some point and overcome the “$2000 latte” problem. If we think about early adopters spending tokens not as fiat but within the token network as an investment to build applications on the network (potentially to earn more tokens), then this seems like a easier hurdle to overcome. Two ambitious projects are aiming to validate this in the next few months: Brave and Kik. If they are successful at mass user acquisition via tokens and incentivizing spending, then the crypto markets will probably blow up even further.
This whole movement also has implications for venture-backed businesses. Traditional venture businesses can decentralize a part of their business model and raise a lot of undilutive capital from the ICO markets AND potentially accelerate their user acquisition via tokens — another interesting path to adoption starting with an existing user base.
There are also tons of questions still around governance and how to best deploy the economic mechanism within crypto-economies. It is clear that tokens have to be distributed into the hands of many in order for the incentive mechanism to work. As we saw with the Brave ICO, where tokens sales were concentrated in the hands of a few big investors, tokens still have a long way to go before all the economic incentive mechanisms are fully functional. Lots of interesting writing on this since I first published this (e.g. Vitalik’s and Albert’s).
Lastly, there is a question around whether decentralized teams can be incentivized to build a great product that will ultimately win user love in the traditional sense? It is clear that the ecosystem lacks product and front end engineers currently, largely because they have not been needed as most of the innovation is still happening at the infrastructure level. However, at some point, the ecosystem needs incentive and coordination mechanism for application developer to produce beautiful UIs, and this is still where the walled gardens have an advantage.
It is also important to note that this hypothesis applies only to the “substitute” phase of the adoption path, which I describe in my previous post (e.g. duplicating internet use cases on the blockchain). I do believe there will be more “transformative” use cases developed in the future that uniquely leverage blockchain technology’s capabilities, but let’s not forget that we didn’t see the internet reach its full potential until just the last decade, and trying to imagine Facebook mobile ads in the age of AskJeeves is difficult to say the least.
And to finish it off, this quote by Balaji really captures the effect of adoption by investment very well:
“Tokens will break down the barrier between professional investors and token buyers in the same way that the internet brought down the barrier between professional journalists and tweeters and bloggers.”