Some blockchains seem more promising than others
Over the last year, hundreds of coin offerings have been announced. Many of them raised barely any money, but there have been dozens of ICOs that have raised millions of dollars for their creators. Some have even raised tens of millions; a handful have topped $100 million. I asked experts which projects showed promise—and how they differed from ICOs that seemed to be little more than hot air.
A lot of the "hot air" ICOs involve startups that try to use cryptocurrency tokens to represent conventional assets. One project, called Bananacoin, for example, uses a cryptocurrency token to represent the sale of bananas. There are several projects to use blockchains to disrupt the real estate business. There are multiple projects for selling event tickets using a blockchain to fight fraud and scalping. There's a blockchain for selling groceries, a blockchain for luxury travel bookings, and a blockchain for transportation services.
Most of the experts I talked to were skeptical of this kind of project because the power of the blockchain comes from its trustless model. Transactions can be verified mathematically, avoiding the need for intermediaries to clear transactions and combat fraud.
"When you try to interface with the physical world, there's trust injected into that relationship," Van Valkenburgh told Ars.
That can cause problems. If you buy a token representing a banana harvest, for example, there's a risk that the guy harvesting the bananas won't deliver. If you buy a token representing a house, the guy living in the house might not move out. In this kind of situation, a blockchain doesn't help you avoid the hassle and expense of using old-fashioned enforcement mechanisms like contracts, title insurance, lawsuits, and so forth.
"Just tokenizing existing real estate doesn't create a liquid market," venture capitalist Albert Wenger told Ars. "My instinct is that tokens only make sense when the tokens play an actual role in the protocol."
Alternatively, as Wenger hints, the most promising blockchain projects were ones where the token was tightly integrated into the network's functionality. For example, there are several projects working to build decentralized file-storage networks. Three of the leading projects in this area are Filecoin (which raised around $200 million in a recent ICO), Storj (which raised $30 million), and Sia (which did not do a presale before launching its network).
The creators of these networks have developed (or are developing) ways for storage contracts to be verified automatically on the blockchain. On the Sia network, for example, storage providers post collateral using the Sia network's currency, siacoin. Providers are required to periodically furnish cryptographic proof they're storing the files they promised to store. If a storage provider fails to supply this proof in a timely manner, it automatically loses its collateral for that contract. Customers never have to appeal to external legal authorities to enforce these deals—it's handled automatically by the blockchain itself, with minimal cost.
Another major category of blockchain-based projects uses cryptocurrency to reward creation of content. Steemit, for example, is a reddit-like social network that stores all site content—posts, comments, even upvotes—on the Steem blockchain. As on Reddit, users vote on the best posts and comments. The difference is that on Steemit, the authors of the most-upvoted content get rewarded with cryptocurrency that can be redeemed for cash. Right now, Steemit has one of the most active blockchains, with thousands of people adding content to the network on a daily basis.
Some of the biggest ICOs have been for projects that aim to replace Ethereum itself. For example, Tezos is an Ethereum competitor that uses formal verification techniques to ensure that Ethereum-based programs do what they're expected to do. Bugs in a poorly verified Ethereum project called the DAO cost investors tens of millions of dollars last year, so Tezos wants to make it a lot easier for people to write bug-free blockchain software. The project raised $232 million in a July ICO
Legal experts in the blockchain world draw a distinction between selling blockchain tokens as investments—analogous to selling stock in a startup—and selling tokens for their intrinsic utility. If you sell an investment token to the general public, there's a risk that regulators will likely treat that as an illegal stock offering. On the other hand, you're on firmer legal ground if you sell a token with practical applications. Bitcoins, for example, are primarily a way for people to make online payments, so selling them likely doesn't run afoul of securities law.
Of course, this distinction isn't always so clear in practice. This is especially true of projects that sell tokens for a network they haven't started building yet. Ether eventually became useful once the Ethereum network was created, but buying ether before the Ethereum network existed wasn't all that different from buying shares in a startup that doesn't yet have a shipping product.
Meanwhile, startups are noticing that token sales are an easy way to raise funds. In August we talked to Brendan Eich, the former Mozilla CTO who founded Brave Software, the company behind the Brave browser. The company built a Bitcoin-based micropayments system into Brave for funding online content. But the company ultimately decided to rebuild the system around a new cryptocurrency invented by Brave called the Basic Attention Token (BAT).
Eich told Ars there were several reasons for switching from bitcoin to the BAT. For one thing, the Bitcoin network has been suffering from congestion lately, leading to high transaction fees. But the possibility of getting millions of dollars of essentially free money was also a powerful draw.
"There was no Richie Rich who was going to endow our user growth tool with a bunch of bitcoins to give to users as a way of priming the pump," Eich told Ars. Instead, Brave launched a token sale that generated $35 million in 30 seconds.
Brave's ability to raise money so quickly was partly a reflection of Brave and Eich's strong reputation, but it also reflected a broader hunger for new investment opportunities among cryptocurrency enthusiasts—many of whom were flush with cash from the rising value of bitcoins and ether. In recent months, it has seemed that anyone who can write a halfway plausible white paper describing a new blockchain-based network can raise millions of dollars to build it.
We expect Eich to deliver on the technology underlying the BAT, but there's a danger that entrepreneurs less conscientious than Eich will raise money with half-baked proposals that they never implement—either because the original idea didn't make sense or because they simply don't bother to follow through.
Indeed, some projects have avoided doing an ICO due to this kind of ethical concern. Sia, for example, didn't hold an ICO and holds fewer than 1 percent of outstanding siacoins. Sia founder David Vorick told Ars that having developers hold and sell coins "creates a very perverse incentive on the network where the development team's whole goal is to push the price of the coin. You might be motivated to lie so you can fund yourself."
Instead, the Sia network is designed so that the company gets 3.9 percent of the value of each file storage contract made on the Sia network. That means Sia only makes money if the Sia network becomes widely used. Vorick argues that this better aligns Sia's interests with those of its users.
If ICO sponsors fail to deliver on their promises, people who participated in pre-sales will suddenly find they're holding tokens that are worthless or close to it. That could create an atmosphere a lot like the one Silicon Valley suffered through between 2000 to 2002—when a ton of previously hot technology startups floundered. That created an atmosphere of broad skepticism about technology startups. For several years, it was difficult for anyone to raise capital for a new venture.
But companies like Google and Amazon survived and ultimately thrived. And while the excesses of the late 1990s had some obvious downsides, the euphoric atmosphere may also have accelerated progress in Internet technology by providing plentiful cash to the most promising startups. Whatever cryptocurrencies find longterm stability in today's crowded market, chances are they'll be similarly worth watching.