ICOs and Lessons from Peter Thiel
Recently, while reading a well known essay by Peter Thiel “Competition is for losers”, the recent state of the Blockchain ICO craze popped continuously in my head. The main thesis of the essay is that for companies to survive and thrive, they must aspire to build a monopoly within their industry, “a company so good at what it does that no other company in the market can offer a close substitute”. In a scenario of perfect competition, all earnings get competed away, disincentivizing newcomers away from the industry. Only profits derived from a monopoly will allow a company to stop worrying about getting money to survive and focus on tending for its employees and creating new sources of value.
Now, the Blockchain industry was born with Bitcoin, the first* digital currency capable of storing and transferring value across the internet without using an intermediary such as a bank or an escrow service, all thanks to the blockchain. The technology was revolutionary enough, to take the thrill further, developers discovered the capability of programming smart contracts on top of that layer, inviting all enthusiasts to dream and fantasize about the endless possibilities of programming code that could allocate, transfer and exchange value in the form of cryptocurrencies without the need for the parties engaging in the contract to get deeply involved in the the bureaucracy of the transaction. There´s only one big problem with this: a smart contract that is legally binding and that is supposed to harbor asset value should always come with the assumption that the underlying code has no bug or single point of failure as not to jeopardize the value stored within. Any programmer will tell you there is no such thing as -perfect code-.
Bitcoin is the most valuable digital currency, be it because it’s the most popular one, the most secure, or because it is the only one outsiders with big pockets wanting to get in on the action have heard of. For a while its supremacy over all other digital coins was unquestioned, until earlier this year when the market cap of Ethereum was dangerously approaching Bitcoin’s. Today, Bitcoin represents only about 46% of the market cap of all digital currencies. This is really low when considering that before 2017 it was almost always above 80%.
In the aforementioned article, Peter Thiel describes the healthiness of a monopoly environment when he argues that the economic system is dynamic, and it is this dynamism what allows new monopolies to surge and old ones to fall. Innovation and best practices are often the reason for this rise and fall. “The Flippening” — the day the Ethereum market cap surpasses Bitcoin’s — is a common subject in blockchain forums. Could this be an example of a new cryptocurrency monopoly dethroning an old one? Anyone prone to fantasize about the potential of smart contracts can see the obvious appeal of a platform like Ethereum. To this extent, some observers even venture so far as to label Ethereum as the most valuable startup ever created, but people in the industry don’t agree with this because they characterize the Ethereum blockchain as an open source protocol rather than a company. In that regard they’re right, it’s not really a startup. However it´s pretty centralized and from many angles, it does look like one; but up until now, the only real world tangible use case for its network (besides decentralized applications that no one uses) has been the incessant release of tokens via ICOs that serve as a new way to crowdfund startups and projects that are based on the Ethereum network. Most of these offer an online service through the use of a smart contract and through the exchange of their native token, which in part fluctuates with the value of Ether.
Take Bancor for example, a super shady project with questionable credibility that managed to raise 153 million dollars in Ether during its ICO in only 3 hours. Bancor offers a smart contract and a token (BNC) that is supposed to serve as a general reserve for all cryptocurrencies and peg their value in accordance to its own reserve. This project has given no proof of the effectiveness of its smart contract and its code has been audited by respected computer scientists just to find that it’s basically flawed. The project has nothing to show for itself yet in managed to break the record of the failed DAO project, an Ethereum based concept of a democratic VC fund in Ether which raised 150 million dollars on late Spring of 2016 only to disappear months later after being hacked for around 50 million dollars in Ether and causing the Ethereum network to break in two in order to repair the damage to the investors. After its ICO, Bancor became the biggest crowdfund ever…until a couple of days ago, when the Tezos ICO ended and raised a whopping 232 million dollars in both ether and Bitcoin. What does Tezos offer? a Turing complete smart contract platform. But, do we even care? More importantly, did you have time to read and understand their value proposition before sending them a % of your cryptowealth? Time is limited and you might not want to miss the chance of being one of the first people to acquire the very demanded Tezzies. What if it does live to its expectations and becomes the “Ethereum Killer”, as it is currently being dubbed? Who doesn’t want a 4000% plus ROI in a couple of years?
Going even into deeper depths, there´s another ICO of yet another “Ethereum Killer” currently going on. EOS was created as a truly scalable blockchain solution for businesses and users alike that is able to process hundreds of thousands of transactions per second, which neither the Bitcoin blockchain nor Ethereum nor any other blockchain is currently capable of doing. EOS is bound the break Tezos’s record. Moreover, Agrello, an Estonian platform that offers “Legally binding smart contracts, powered by AI” is also currently having an ICO.
So where am I going with all this? At some point you start questioning if all these sort of Blockchain platforms actually have a unique value proposition or they are only recycling the same idea and sugarcoating it to seem unique. For me, the most interesting point in “Competition is for Losers” is the spectrum Thiel draws between perfect competition and full monopoly scenarios and how most companies find themselves at one extreme of the spectrum but will do everything in their power to portray themselves as if they were on the other side of said spectrum. Google, he argues, is a good example of a monopoly of search engines, but it will attempt to show that it is in a very competitive industry to avoid the prying eyes of regulators and antitrust government entities. On the other hand, any company on a competitive industry will attempt to stand out with claims that no one else offers what they do.
This seems to be the case in the ICO world lately. All these past examples offer a smart contract platform, however all seem to claim to be a unique and better alternative to what is already out there. Bancor offers in their token a unique and better way to allocate value than all other digital currencies. In one of their videos they claim that the more people use the Bancor token, the more value it captures! That sounds straight out of a pyramid scheme if you ask me.
You can clearly see how competition in the nascent Blockchain industry drives a lot of projects to self identify as a monopoly in their own offering. EOS went as far as to rent advertising space on a jumbotron in Times Square during May´s Consensus Blockchain Convention in New York. Out of the thousands of people that walked in front of that space during the convention, how many were able to discern what it was? I would’ve probably thought it was announcing a Broadway musical. In Peter Thiel’s words: “You´ll spend time and money trying to convince people you are different without considering whether that is true”.
So, are all these projects aspiring to dethrone Bitcoin and Ethereum and become the one coin to rule them all? I am definitely rooting for better and more scalable solutions to what we currently have. After all, I do have great faith in the potential technological benefits of blockchain technology. I would just rather see all these projects demonstrate real world applications of their platforms and prove bug-free functionality of their smart contracts before them trying to keep raising the record of the biggest crowdfund ever. In the end, success is not about how much money they raise, it’s about how much value their projects create, and how much of that value they are able to capture and return to their investors.