This Analyst Note assesses the key trends in the cryptocurrency ecosystem along with DAOs, DAPPs and ICOs and evaluates the evolution of Fast, Feeless and Minerless Third generation Blockchain Technologies.
Currently, the terms cyptocurrencies and blockchain are fused and amalgamated in people’s minds thanks to the hype and overexposure. However, there exist three key (inter-related) phenomenon in the crypto ecosystem, each with rapidly evolving trends – Digital Currencies, ICOs and Blockchain Technology.
Digital Currencies – Rapid Growth, Volatility, Regulation and Stability(?)
Currently, there are close to 1,500 cryptocurrrencies, tokens and alt coins listed across various exchanges (according to Coinmarketcap). This number has almost tripled in the last two years.
The open-source nature of most cryptocurrency systems means that it is fairly easy to make copies of the software (or “fork” its code, in developer parlance), make some modifications to the protocol, and release it as a new, wholly separate system. This was witnessed in the recent years. As Bitcoin’s price began to increase rapidly in the second half of 2013, many developers around the world began forking various cryptocurrency protocols to establish their own coins. By 2013, most of the forks were off of Litecoin (another digital currency), which is based on Scrypt (a hashing algorithm designed to make large-scale hardware attacks costly). By 2013-end, as it became inefficient to mine Bitcoin on commodity hardware (such as graphic cards or GPUs) a number of Scrypt-based currencies (which were still economical to hash on graphics cards) began to appreciate in value, giving rise to separate cryptocurrencies that were forked off of the original protocols to rise anew.
The goal was to create cryptocurrencies as valuable, or at least as lucrative, in the short-term, as Bitcoin. This somewhat haphazard approach of throwing cryptocurrencies against the proverbial wall and hoping that something sticks was certainly effective at expanding the scope of blockchain-based currency systems.
In 2017, large number of retail investors, especially from China and Japan, with little knowledge of cryptocurrencies started buying and trading all forms of digital currencies, along with some institutional investors who looked at cryptos as a potential hedge for their positions in equity and bond markets. This led to significant rise in the value of digital currencies all through the year.
However, the recent announcements by global technology companies such as Google, Facebook and Twitter on ban on ads of digital currencies, along with various governments (including US, China, Korea and India) banning the sale, (in some cases) trade and acceptance of cryptocurrencies as legal tender has dented the rise of these assets and clamped their growth.
Currently, we are witnessing the early stages of Stable Coins (such as Tether, Havven, MakerDao, Basecoin, etc). A “stable coin” is a cryptocurrency that is pegged to another stable asset, like gold or the U.S. dollar. It is a currency that is global, but is not tied to a central bank, and has low volatility. This allows for practical usage of using cryptocurrency like paying for things every single day.
ICOs – Disrupting the Established VC Funding Model
An ICO (Initial Coin Offering) is a fundraising tool that trades future cryptocoins in exchange for cryptocurrencies of immediate, liquid value. In 2016, there were 50 ICOs, which increased to 250 in 2017. The first three months of 2018 have already witnessed the launch/announcement of over 500 ICOs.
ICO is fast evolving as a successful fund raising approach for startups. In 2017, funds raised by ICOs far exceeded the VC funding for cryptocurrency and blockchain based startups. According to Crunchbase data, in 2017, USD 1.2 Bn was invested by VCs in blockchain-based companies, while over USD 4 Bn were raised through ICOs. On 6th February, 2018, the worst day for cryptocurrencies as their valuation slipped the most, with Bitcoin reaching USD 5,946 (from the high of USD 19,300), Fusion - a public blockchain creating an inclusive cryptofinancial platform – had raised USD 50 Mn in token sales through ICO in 24 hours… proving that there is value to be derived for the right startup tackling the right problem with an innovative solution.
ICOs are also changing the investor profile for startups. While in the VC model, it is the partners and fund managers that take a Yes/No decision on a startup’s future, basis a set criterion, in ICO, the investor is typically a 20 to 30 year old computer specialist who has been an early adopter of crycptocurrency mining… more open to new and radical ideas and of risk taking nature.
Evolution of Blockchain 3.0
In the technology startup ecosystem, “On the Blockchain” is the new “Uber of”. There exist over 1,000 DApps (Decentralized Autonomous Apps – Apps built using blockchain technologies) across 36 industries. Any and all kinds of web and mobile-based solutions are now being developed on blockchain.
The Blockchain technology that powered Bitcoin is a relatively bare-bones system that requires layers of protocols to be built on top of it to make it a usable platform for utilities like smart contracts. Ethereum, on the other hand, was launched with its own scripting language baked in, making it possible to build complex smart contracts, Decentralized Autonomous Organizations (DAOs), Decentralized Autonomous Apps (DApps), and even other cryptocurrencies with relative ease. Bitcoin’s rise into popularity resulted in its supporting blockchain technology being categorized as Blockchain 1.0. With Ethereum’s broad adoption as a decentralized platform for applications that run exactly as programmed, enabled it to be categorized as Blockchain 2.0.
Currently, we are witnessing a new set of Blockchain platforms and networks based on DAG (Direct Acyclic Graph) technology. There exist a number of DAG based blockchains such as Hashgraph, IOTA, Stellar, NEO, RaiBlocks, etc., which have been developed for specific real world problems. These platforms belong to the 3rd generation, or what we call "Blockchain 3.0" group, and are developed to overcome the key issues of the original Blockchain (Blockchain 1.0) and Ethereum (Blockchain 2.0), and are designed on FFM - Fast, Feeless, Minerless – concept.
The DAG based blockchain technologies remove the Miner from the equation by using "Gossip about Gossip" protocols, in which the machines on the network spread the transaction information and verify and authenticate, instead of "Gossip" protocol used by (first gen) Blockchain and Ethereum in which there is a dependency on the Miner to solve the puzzle, verify and authenticate the transaction. While theoretically, these technologies are capable of handling hundreds of thousands of transactions (per second) as compared to 6 to 7 transactions per second by the (first gen) blockchain, we have witnessed certain DAG based platforms perform over 10,000 transactions per second in real-world scenarios.
Hashgraph is one of the most popular and leading DAG based blockchain technologies. It is a next-generation, evolved technology in the right direction. And, the company that developed it - Swirlds - is adopting the right strategy of designing and positioning it as a white-labeled, private chain targeting large enterprises across industries to solve the real world problems using blockchain, instead of developing another crypto token for public sale. These 3rd generation, DAG based blockchains are definitely a step in the right direction, and are being developed, evangelized and positioned in the right manner, solving all the key issues with the existing blockchain technologies. But, the question whether it will be the definitive platform of the future and end of it all? is far from being answered.
Currently, in the blockchain technologies and ecosystem evolution, we are in the mid 90’s of the Internet era. It is difficult to differentiate the Amazons and Googles of the blockchain world from the Pets.com and eToys. The current technologies and solutions in the space suffer from limitations that keep them from seriously challenging centralized incumbents. The most severe limitations are around performance and scalability. The next few years will be about fixing these limitations and building networks that form the infrastructure layer of the crypto stack. After that, most of the energy will turn to building applications on top of that infrastructure.
The key lesson is that if one compares centralized and decentralized systems, one needs to consider them dynamically, as processes, instead of statically, as rigid products. Centralized systems often start out fully baked, but only get better at an incremental rate. Whereas, decentralized systems start out half-baked but, under the right conditions, grow exponentially as they attract new contributors.
An edited version of this Analyst Note was published as an Op-Ed in Mint's Quarterly Technology Review on 30th March, 2018.