The 2017 boom in crypto prices encouraged many entrepreneurs to build or launch their own cryptocurrencies or tokens to fund development projects.
Following the decline of crypto prices in 2018 the crypto market is having its .com moment. BitCoin, the bellweather for crytpocurrencies, pulled back to its 2017 lows in June 2018. The whole crytpoasset market is currency valued at $200 billion, less that the size of the reported money landering scandal from a single Danske Bank branch.
I thought it time to get to the bottom of some of the technical issues with industry expert, Dr. Jerome Rousselet.
Jerome has a PhD in Theoretical Computer Science and is the founder of Jita, a blockchain and crypto advisory services business helping startups and companies to define their strategy, build their team, review their technology roadmap and improve their security practices.
I first met Jerome in the crytpo community in 2017 in the token project space where he has worked on numerous projects across protocols and I was impressed by his practical and frank views about the sector and the technology. His credentials as a blockchain technologists are impressive and he has been active in blockchain for a number of years, including as the Chief Revenue Officer for Mycelium, the digital wallet.
I spoke with Jerome about his observations during the crypto boom period to better understand some of the drivers of crypto prices and community behaviour, and as importantly, to better understand what is going on right now in the blockchain and crypto space that’s worth paying attention to position for the next cycle of development and growth.
Q. As an advisor to crypto firms, what are the major issues you see in how different protocols have been deployed to date?
A. The open source nature of blockchain projects make it particularly easy. It is trivial to take the whole bitcoin source code, modify the project name and launch a new crypto currency that is 99.99% identical "under the hood" but with a big marketing push to position it differently. Many 'old' crypto currencies were created like this. Other are also based on Bitcoin but add a few new features, tweaking the mining process, the block size, or trying to add more features. Litecoin, Dash, BitcoinCash are in this category.
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Next to these bitcoin-like currencies, we have seen more interesting entirely new blockchains like Ethereum, which still use proof of work mining but offer new features, the so called smart contracts and the token economy.
Recently we have seen niche blockchain, technologically innovative, applying computer science programming languages research to blockchains. We could call them smart contracts 2.0: Tezos, Zilliqa, ZenProtocol. They aim to offer verifiable smart contracts, which trade some Turing Complete capabilities of Ethereum smart contracts, for higher speed, higher capacity, lower costs, and execution guarantees (the smart contract will always finish). While there is strong momentum around these platforms, they are still looking for their killer app.
Finally, many token economy projects (dapps) have lately discussed building their own blockchain. We believe this both under estimates the complexity of running such projects and over estimates the market size for different blockchains. We believe there are three segments in the industry:
- Protocol Layer / crypto currencies: with a limited number of players
- Infrastructure: exchanges, wallets, miners, custody
- Distributed Apps: B2B or B2C, offering new services and consumer value.
Trying to address two layers is very challenging. There is a high risk of losing focus and under delivering, and ultimately the economics are all different.
Q. What are the various strengths and limitations of the different protocols?
A. Bitcoin is the oldest, most mined and most liquid blockchain. This year it has positioned itself as a store of value, after a challenging 2017.
Litecoin has proven itself to be a reliable alternative to bitcoin, with less money at stake and a more consensus driven community. An ideal place to test in production controversial new features for Bitcoin.
Ethereum is still the main smart contracts platform, in terms of brand, community, projects, token sales and market cap. We see more and more interesting projects being built on Ethereum, so assuming it solves its scalability issues some Ethereum could deliver real innovation in terms of decentralized governance and tokenized economic models.
EOS was the biggest ICO, lasting one year and raising $4 billion. Its long token sale managed to attract a diverse community. Its focus on existing programming languages like C and C++ will attract a huge experienced developer base who have had nothing to do with crypto currencies and blockchains to date.
EOS is well positioned for enterprise solutions, it solves scalability in its initial design, relies on an entirely different security model called delegated proof of stake (instead of proof of work), and solves economic pain points for Ethereum users and businesses: businesses acquire some EOS tokens, this guarantees them capacity on the EOS network, and they know how much it costs, offering cost predictability.
Users don't have to pay anything for EOS, and smart contracts can be stopped and upgraded by their owners, just like a company can update its website - Ethereum users must pay gas to execute contracts, and if they don’t put enough in it will fail. The governance model of EOS takes humans into account, while Ethereum requires humans to be errorless, write perfect code and estimate gas costs accurately.
Q. The cryptocurrency market has had a tough year with most coins down year on year and especially from Q4 2017 all time highs. What factors do you attribute to this downward price movement and where does this leave the market?
A. I believe a lot of Ether was bought to invest into ICOs, and some investors and ICOs were reinvesting into other ICOs with the Ether they raised.
They obtained 10x to 100x returns and were chasing similar returns in new tokens. They may also have convinced themselves that as long as they were only exchanging crypto to crypto and not government issued fiat currency, it was not taxable. This remains to be seen.
At some point these returns began to level off, likely due to a lack of new money entering the system. Large ICO and recent investors started cashing out, and the same reasons that led to the rapid rise of the token economy led to its deflation.
Interestingly, while Bitcoin is also three times lower than its December 2017 high, it de-correlated from the other crypto currencies and tokens, emerging as a store of value in the crypto currency market. Bitcoin represents now around 55% of the whole of crypto market cap.
The deflation of the bubble was very healthy. Many amateurs projects disappeared, retail investors will stop losing money, and only a few projects can now raise more than 20M USD. Better sized investments will be better both for the development teams who now have to deliver, and the investors who now have a chance to see a return on investment.
In Europe, the EU is discussing an ICO framework with KYC rules and a $8 million hard cap. This could be good news for the ICO retail market, facilitating banking and reducing retail investor risks.
Q. Ethereum has seen a downturn despite being the protocol of choice for most ICOs to date. What do you put this recent movement down to?
A. Exactly, because it went so high so quickly last year, it was extremely volatile. Vitalik himself was warning against such valuations, and we now observe the same volatility going in the opposite direction.
Ultimately the vast majority of money that went into Ethereum was invested into ICOs, and the vast majority of ICOs have not delivered viable projects yet. It was extremely speculative.
According to TrustNodes research ICOs dumped 3 times more ETH in September 2018 than August 2018 to hedge their risks and safeguard their project's budget.
It is possible to monitor these funds on the blockchain so this is very visible.
There are still tons of ETH remaining in these big ICO smart contracts. What they will achieve remains to be seen.
There is also still a lot of talent and a big community behind Ethereum. If some of the money is well spent, and if Ethereum succeeds its technology transformation to become more scalable, we may observe exciting product launches on Ethereum.
Q. What industries are you seeing move to credibly explore and adopt blockchain?
A. We have seen industries move one after the other into blockchain. For instance, in March we were discussing a token for a football club to reinvent the relationship with the football fan. In September we have seen several such projects being publicly launched, notably by French football team Paris St Germain.
Last year transparent betting systems, video games and virtual worlds were very active in blockchain.
Currently, we observe many projects in the loyalty schemes for retail merchants, insurance, health (electronic healthcare records) and accounting solutions (intercompany close process with a major fashion brand).
Whatever the season and the crypto market, it seems there is always a new industry to discover blockchain.
Q. Security Tokens have become more prominent since the Howey test and the decline of crypto prices. What are your views on Security tokens and what developments do you think are needed for STs to become more widely adopted?
A. We see a lot of effort on the supply side, with finance professionals tokenizing their favorite products, developers introducing new standards such as EIP1400 enabling whitelisted secondary markets, entrepreneurs and VC building new security marketplaces, and regulators and governments trying to attract them.
But ultimately the demand for such products is not clear yet. The current token market has clearly been looking for high yields at 100x over 6 months. Unfortunately some of our clients suffered from this market, as there is little demand for a 5% annual return security token fom this investor base.
This may well change, but with lower velocity it will take more time. In a few years time security tokens may make crowdfunding a much more affordable option, currently it costs around 14 percent of the funds raised, excluding post raise costs. STs may also attract more longer term investors at the lower end through P2P (retail) and at the higher end through asset managers (institutional).
More exciting, truly innovative products and services may well emerge built on top of ST but we have not found them yet.
Q. What is happening in the stablcoin space and do you see these new tokens as offering a better proposition to consumers?
A. Very good question, stablecoins are very popular these days!
The general idea is to reduce the price volatilities in the crypto economy. It could certainly increase interest in the crypto economy if not all tokens were so highly correlated with ETH and BTC. Currently, diversifying in crypto is like buying several flats in the same building.
I am very doubtful of many of these attempts, they are very R&D and academic oriented. I am thinking here of algorithmic stable coins, which supposedly self stabilize their prices by controlling supply, emitting and burning coins.
To me, it is liquidity that brings stability. So reserve currencies are stable coins, and maybe Bitcoin and Ethereum are becoming stable coins (compared to other crypto currencies and tokens). Bitcoin is currently at its lowest volatility for the past 12 months.
Tether (a token representing 1 USD, managed by exchange bitfinex) and the new USDC (created by Circle, with a governance structure) are the tokens who are going to provide stability. Many people dislike tether, and say it is manipulated. I am not so sure. In recent months, BTC-Tether was apparently the largest trading pair, so it is very popular. Last week there was another rumour that the bank used by bitfinex for tether was going to go bankrupt. I think these rumours are there to manipulate the market.
In any case, USDC has a clear governance structure, banks in the US and could become bigger than tether. These are very boring stable coins, but maybe boring and stable are synonymous :)