Deciphering the value of cryptocurrencies

20. December 2017.

Editor’s note:This article originally appeared on ATM Marketplace, a Mobile Payments Today sister publication.

Do you frequently ask yourself, “Why is there a double coincidence of wants in asset exchange?” Do you often wonder, “What can the infinite blockchain computer do?” Have you always wanted to “Warp economic spacetime to create dynamic/evanescent/impossible/infinite organizations”?

If so, you might want to look into blockchain startups Bancor, Dfinity and Economic Space Agency. They would like to interest you in their cryptocurrencies, whose sale will support the attempted development of a decentralized app.

Caveat emptor: Adam Ludwin, co-founder and CEO of Chain, a cloud-based supply chain integration platform, and a blockchain expert, is not even sure what these three DAPPs are supposed to do.

He admitted as much in his presentation, Separating signal from noise: Making sense of the blockchain landscape, at October’s Money 20/20 in Las Vegas.

Déjà vu all over again

If you remember the internet bubble of the ’90s, the current landscape of blockchain startups, initial coin offerings and references to “a new business paradigm” will look weirdly familiar.

The similarity begins with the massive amounts of money startups are attracting — including some like the three above that defy explanation. According to Ludwin, the combined market capitalization of blockchain startups today stands at $170 billion, a stunning sum that continues to grow by leaps and bounds as consumers who first heard of bitcoin last week rush to open their account with a cryptoexchange and start wagering on startups.

“Every single day, Coinbase alone — and this comes from their CEO — has the equivalent of the Giants stadium in San Francisco signing up for new accounts,” Ludwin said. “Every day there’s a new cryptocurrency or token that combines some buzzword with blockchain and raises tens of millions of dollars.”

For the record, the seating capacity of MetLife stadium, home of the Giants, is approximately 82,000. The likelihood that 82,000 average consumers are becoming cryptowhizzes overnight is approximately zero. A lot of them have no very clear idea what a blockchain is.

Defining terms

Ludwin said that two distinct market segments that make up the blockchain space:

The first segment is all of the cryptocurrencies that have come since bitcoin, which, together with bitcoin, represent really a whole new asset class … [that] serves a clear purpose, which is to enable a new model of software.

The second [segment is] what I would call cryptoledgers, which are simply a new kind of ledger that is a lot more secure and flexible, and really represents a new tool for enterprises, whether those are financial institutions or commerce companies or fintech companies.

Understanding how they work together begins with a simple question, Ludwin said: “‘Are cryptocurrencies valuable?’ … In order to answer that question we have to go a little deeper and ask, ‘What are cryptocurrencies for?’ … And then we have to take one more step and ask, ‘What are they even?'”

Here’s his definition:

Cryptocurrencies are a new asset class that enable decentralized applications … And since we’re claiming it’s a new asset class I call these cryptoassets, because the word cryptocurrency is a bit of a head-fake. It brings a lot of baggage of what a currency is and that is really not what these are. These are a new asset class.

But what does it do?

Like every other class of assets, cryptoassets support something, Ludwin explained. Securities support corporations; treasuries support government efforts to raise capital; mortgages support homeowners; cryptoassets support decentralized applications.

“What we really have to ask is, ‘Are decentralized applications valuable?,’ and then come back to the question of whether cryptocurrencies are,” Ludwin said.

And frankly, he said, not all DAPPs really are valuable. This has to do with the fact that, fundamentally, a decentralized application doesn’t do anything that can’t already be done with a centralized application.

“On every dimension, the centralized counterparts tend to beat the pants off the decentralized ones,” Ludwin said. “They’re faster, they’re cheaper, they’re more scalable, they have a better experience, they operate without drama, they don’t have rapidly fluctuating values underneath them.”

There’s just one thing that decentralized apps do better: censorship resistance. Access to DAPPS is open and transactions are unstoppable. So, Ludwin said, the question becomes, who benefits by giving up speed, cost, scale and user experience in order to achieve censorship resistance?

Using this question as a starting point makes it far easier to say whether a cryptocurrency has value. If it supports a DAPP that consumers or industries or governments value and want to use, then the cryptoasset will be something that individuals and organizations will want to own.

In short, Ludwin said, “I know that in the long run, a cryptocurrency’s value is going to be driven by people using the underlying decentralized application.”

The wisdom of Warren

In the late ’90s, a great many well-educated MBAs rushed in to declare that the boom had ushered in “a whole new business paradigm.”

Obviously it hadn’t. We learned all over again that markets respond to one thing above all others — demand. And they reward one thing above all others — efficient delivery.

Some decentralized apps will rise to those standards and become Googles and Amazons. Most will not. And it won’t always be easy to know which is which, Ludwin said.

“We should just remember Warren Buffet. He says, ‘Only invest in things you understand. The price is what you pay; the value is what you get.’ So if you don’t want to take my word for it, take Warren Buffet’s.”

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