Will bitcoin’s decline lead to a blockchain winter?

5 min read

bitcoin

Very few will disagree that bitcoin was a bubble. And it popped. Since its insane rise to near-$20,000 price at the end of 2017, bitcoin has shed more than 80 percent of its value. Ether, bitcoin’s runner up and the main currency for initial coin offerings (ICO), has fared even worse, losing more than 90 percent of its peak value.

The question is, will the crash of bitcoin and other cryptocurrencies also result in a loss of interest and funding in its underlying technology, the blockchain?

As cryptocurrencies rose in value and popularity, a market emerged for dapps, decentralized applications that use blockchain’s innovation to deliver us from the tyranny of the centralized internet. Even the biggest critics of bitcoin acknowledge the value of blockchain.

But blockchain projects are largely dependent on the performance of the cryptocurrency market. To be clear, the blockchain industry was already struggling for reasons other than the reduction of cryptocurrency prices, but now, blockchain startups will be facing even greater challenges.

Blockchain’s funding dilemma

“In crypto, the technology and the funding are related,” says Mark Devlin, CEO and founder of NewsBlocks, a platform that aims to establish trust in online journalism by registering facts on the blockchain. “The funding is particularly tied to the success of bitcoin at the moment.”

As opposed to other areas of the tech industry, where funding mostly comes from VCs and government institutions, blockchain projects have received most of their funding from longtime holders of bitcoin and ether, and ordinary people who jumped on the cryptocurrency bandwagon as prices of digital currencies and tokens soared.

Now, in the wake of bitcoin’s disastrous crash, the early adopters of bitcoin and ether still stand at massive gains, but a lot of the people who entered the space in the past two years have suffered considerable losses

“Those who believe in the utility of blockchain technology remain undeterred, but it is natural that speculators would be increasingly hesitant to again get involved in a blockchain-focused capital market play or a digital asset. The rapid rise in cryptocurrency prices in late 2017 saw an influx of speculators, and those people now remain on the sidelines,” says Duncan McIntyre, co-founder and COO of FansUnite, a sports-betting protocol on the Ethereum blockchain.

What this means is that new blockchain projects will find it difficult to raise funds through ICOs and they’ll probably have to seek the support of more traditional investors, if they can earn their trust.

Blockchain’s other struggles

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But earning that trust will not be easy. Not all of blockchain’s problems are related to bitcoin’s price fluctuation. There was already a fair deal of warranted skepticism toward the industry even before cryptocurrency prices started their fast decline.

During the 2017 ICO boom, many startups raked in millions of dollars in token sales with little more than a flashy website and whitepaper. Many projects were nothing more than a promise to reproduce a popular online service (Facebook, Uber, Netflix…) on blockchain.

“Right now, we are in a stage that draws parallels to the aftermath of the dot-com bubble,” says Antoni Trenchev, co-founder of Nexo, a crypto-lending platform. “We had some irrational exuberance, and saw all sorts of unrealistic ICO ideas, propositions and valuations. The popping of this bubble led to mistrust.”

A considerable number of these ideas failed without delivering on any of their promises, and several turned out to be outright scams. The space has also been fraught with all sorts of other questionable practices, such as on-boarding celebrities to promote crypto-tokens and coordinated pump-and-dump schemes to make profits off the synthetic fluctuations of token prices.

“Unfortunately, these types of projects capitalized on the hype surrounding digital assets (cryptocurrencies) in late 2017, and any contributors to these projects have likely experienced a significant loss of value,” says FansUnite’s McIntyre. “Of course, this loss of value does not mean only a reduction in digital asset value, but can also be an abandonment or arrest of technical progress on a proposed platform. Contributors to these projects are likely wary of future contribution to other blockchain-based projects and may even irrationally reject using a product that utilizes a digital asset.”

Parallels to the AI winter

Some of these developments are reminiscent of the AI winter. In the 1980s, funding and interest in artificial intelligence projects dampened because of overpromising and underdelivering by scientists and researchers. Subsequently, to avoid disenchanting reporters and investors, tech companies and organizations started using alternative terms such as “expert systems,” “machine learning,” “analytics” and “big data” when introducing products that would clearly fall into the AI category. A prominent example was IBM’s Deep Blue, the super computer that defeated world chess champion Garry Kasparov in 1997. At the time, IBM explicitly stated that Deep Blue did not use artificial intelligence (PDF).

Presently, many blockchain companies and their PR agencies are pitching themselves without making any direct reference to blockchain or cryptocurrencies to avoid putting off their audience. Instead, they’re using terms such as “unstoppable network,” “decentralized,” “censorship-resistant” and “surveillance-resistance,” which are clear references to blockchain and other distributed ledger technologies. (I’ve received several such pitches myself.)

Devlin, the executive from NewsBlocks, acknowledges that reporters, on whom startups rely to spread the word about their projects, are viewing blockchain startups with increasing negativity.

“When you have a valid case for using the blockchain and you see journalists cutting themselves off from any contact, then it just makes your heart sink,” Devlin says. “I’ve actually got a real use case for this technology, and I’m willing to defend it, and I’m willing to stand up for it. I’m also willing to change it if I’m proven wrong, if this technology doesn’t actually work or if there’s a better one. But if you won’t even listen to me because you’ve got a preconceived idea then that’s not very good.”

Devlin says he’s had experience with several technology blogs (he names Hacker News as one), where he tried to introduce his solution in discussions surrounding trust in news outlets. But in 40 percent of his outreach, he was outright told that he’s running a scam because he was using the words “blockchain” and “ICO.”

“These are technology people. They should understand the opportunity with this new technology,” he laments.

The silver lining

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While the AI winter was real, innovation in the field never stopped, and eventually, with the advent of neural networks and deep learning, AI regained its popularity—albeit in a questionable fashion—among private investors, government institutions and the general public.

There are plenty of signs that the blockchain industry too will turn around its fortune despite the many challenges it faces. Silently but steadily, a lot of innovation is happening in the field. Bitcoin launched its lightning network last year, an application layer that enables instant payments on the network. Ethereum developers are also building a similar technology and are steadily rolling out updates that make it easier and less costly to develop and run applications on the Ethereum blockchain.

Meanwhile, the companies that raised hefty amounts in ICOs in the past two years are still flush with cash, and many of the legitimate projects are spending their funds on developing real applications.

“It is now up to those companies that have secured funding to deliver the promises they made so that the trust of investors can be regained,” says Nexo’s Trenchev.

“The technology is moving at an amazing pace, and it’s inevitable that the funding will catch up,” Devlin hopes.

But before funding catches up, blockchain will have to find its undebatable proposition value, as the cloud did in the early 2000s. In the aftermath of data breaches and privacy fallouts at large tech companies like Facebook, there’s been a lot of debate that people will flock to blockchain dapps that give users back ownership and security of their data. But it hasn’t happened yet. We’ll probably see many more security and privacy incidents before billions of non–tech savvy users decide to take back control of their data—if they ever do.

“You tell the person in the street ‘we’re going to make this system using blockchain.’ They won’t care,” says Devlin. “What they care about is does it solve the problem they want to solve.”

The era of trying to market blockchain projects by creating “decentralized” versions of well-known applications is probably over, and the industry will have to find its own killer app. In the past year, we’ve seen some unique paradigms emerge, such as crypto-collectibles and decentralized prediction markets. Many industries such as social media have also shown interest in adopting some aspects of blockchain or cryptocurrencies. But the jury is still out on which category of blockchain applications will eventually achieve mass adoption. What’s for sure though is that a lot of them will fail.

Devlin is not worried about that. “The exact same thing happened in the dot-com era. We had massive investments in projects that were never going to work, and the market eventually collapsed. But it didn’t stop the fact that there were still some good projects and it didn’t really stop the idea that the internet itself was something that was really great,” he says.

Today, the survivors of the dot-com bust are among the most valuable companies in the world. Will blockchain experience a similar resurgence? Time will tell.

As the industry matures, investors and customer and journalists will become more educated and they can make better decisions, Devlin believes. “First they ignore you, then they laugh at you, then they fight you, then you win,” he says, repeating a quote (wrongly) attributed to Mahatma Ghandi, the assassinated leader of the Indian independence movement.

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