Crypto Assets Will Implode in Package if They Aren’t Zoned

The crypto economy is the whole world of the new in the outer space of the old. My deja vu is triggered every time the ordinariness of discussion is applied to the real marvel: the miraculous incomes, the unprecedented unregulated environment, the “fantasticality” of organized resources that are capable of giving a birth to highly complex systems better than FRS, Amazon or SETI.

The crypto economy is an isolated hollow cylinder. Its surface separates two very different economic medias, with very different levels of “pressure” and “temperature”.

The way the crypto community treats ICOs lately really reminds me of the above analogy. We did not go the route of a traditional sphere; we’ve squared the chance of a sphere into a cylinder’s evolvent for cosmetic reasons. We’re obsessed with the nominal idea of decentralization, pushing it to spots where it’s not applicable or useful. We ran out of app ideas and started to blockchain-ize things that don’t need to be. The gotta-be-cool factor in evaluating projects has grown way too big, especially considering the serious kind of money already involved. It’s no longer a joke, we’ve got a lot to lose now. Rumors are that ICOs lately, to a large extent, have been fed with easy-come-easy-go money by early bitcoins adopters. Those people need their capitals to be diversified and/or stealthily evaded from their home country one way or another. Once the project looks “legit” (whatever that broadly-used term means today) and cool, the money goes in. (Some whale’s bullshit meters are set too low.)

Being at the beginning of summer 2017, this is all becoming pretty scary. Since we’ve already made our choice in favour of a cool but dangerous approach of a hollow fast-rotating world, we now have to exclude the chance of our space station’s total explosion. It always starts with a single small leak. There’s only one proven safety method — the one that keeps submarines from total implosion — that is, to implement an impermeable partitioning; in other words, to build many perfectly separate zones.

Other than two assets with their own separate reputation and meaningfulness — Bitcoin and Ethereum — the ICO space is considered as one (ETH is probably about to lose that unique position too). Collective will be its bubble burst too — it is inevitable. Chances are there are great assets out there — we don’t yet know for sure, maybe some time is needed to prove their real utility. However, this coming implosion will take a toll on every asset. They will all be severely damaged. For many, the next catastrophe will create a brotherhood grave. Ethereum and Bitcoin are overhyped too, the time has come for both to show some real-life utility (but that’s another story); these two should recover quickly.

Without any doubt, there are very weak overpumped spots in the ICO space that will soon start to leak. There are some projects I have perfect knowledge of (and I’m pretty sure you know a few too) that are an absolutely idea-less bullshit with semi-fake “teams’’ and… a lot of investors’ money on board; they are all pumped to unprecedented pressure now. No matter how many good projects will stand the tension, empty ones will implode. And if there’s still no “zoning” in place by that time, one little boom will cause a domino-effect throughout the entire club. It’s amazing how very different in quality projects are in the coming deadpool. We are about to throw a baby with a bathwater.

How annoying is this common misconception in the young crypto community — denying all older generations’ institutions, with no filters, for no good reason. ICOs always were, to large extent, a way to bypass incumbent strict capital market regulations, just as binary “options” try to fool anti-casino laws. Regardless, ICOs are a good thing for both global technology and the economy. However, clumsiness of old rules doesn’t mean we shouldn’t have any rules at all. We at least need some rules of thumb. That is to say we, ordinary ICO investors and community members, should and can make the ICO space less toxic. No hardcore or expensive efforts are required, we just need to apply some more intentional zoning and trivial filtering when supporting projects.

“Stock Picking” in the Cryptoassets World: Zone and Conquer

The idea is very simple: every one of us does some stock picking work once in a while anyway; this process can be combined with zone labeling. Of course, ICO listing resources or prominent funds can do that on their own, but it’d be fair if even an “active subreddit lurker” could contribute to the collective opinion. Maybe one of the trackers can start doing that. Instead of marking whether an ICO has a white paper or not, and how many people they have on the advisory board.

From a portfolio manager standpoint, the crypto space is the field to manage manually, asset by asset. There aren’t too many coins out there yet, those worthy are still under a hundred altogether and operational frameworks are absent. Therefore, a subjective human judgement can be used to classify projects into separate groups where price-driver sets are fundamentally different. Below I suggest four zones for the first hierarchy level.

Naming a thing into the category — should the labeling be applied as a common rule — affects people’s attitude from both sides of the project border. Insiders will behave more accordingly; outsider will invest more responsibly with the in-category comparisons in mind.

[1 of 4] Infrastructure

This group includes protocols, platforms, and stand-alone blockchains that allow assets and apps to be built on top of them. The token price should, to a large extent, depend on the [real + expected] number and quality of hosted apps. Examples: Ethereum, IOTA, Tezos. The problem: there are surprisingly many projects here; in fact, too many. It’s not exactly obvious what projects can boast both needed components — a diverse and stable social background plus unique technical properties.

Considering the competitive environment in this segment is strongly affected by the network [Lindy] effect, a successful newcomer has to be really outstanding. If you are running for president with only a municipal experience at hand, you’re laughable. The same is true for the great majority of ICO-ing projects that promise to “replace banking”, “revolutionize finance”, and “get rid of all drawbacks of Bitcoin and Ethereum”. Launching yet another blockchain that aims to copy a market leader with an improvement is like saying, “I’m going to create a platform to compete with the Playstation, due to faster graphics.” Even if the better specs can be validated, it only represents a small fraction of the leader’s dominance.

On the other hand, belonging to the infrastructure segment guarantees neither any pre-determined profitability nor extra liquidity. For both organizers and investors, infrastructure projects are fairly average — they are just as good as those in the hierarchically lower segments. So why bother and try to jump over a higher bar? Unlike in other categories, there’s a peculiar psychology involved here. I’m sure you’ve met this type of a person who wants “only the best”, who is permanently encouraged by examples of the best billionaires and who is sure they must aim at something many levels higher than what they are able to understand and imagine. You know what? These people add to deadpools the most, partly because of idiotism, partly because of extra-stubbornness that causes lifetime multi-project-ness.

And this type of person wants to build “platforms”. Why are we wasting money on pre-defined losers? Why are we deliberately ruining the reputation of the crypto community by supporting obvious junk? And, most importantly, how can we keep making fun of Ripple, Corda, and Hyperledger after that?

I suppose we should really raise our acceptance bar here, we don’t want to shadow our community’s best achievements like that. By separating this zone, we can make huge progress in protecting the entire crypto environment; we can stop yet another idiot from running for presidency in order to ensure such an individual doesn’t damage the reputations of honest, industrious mayors.

[2 of 4] Distributed Applications

Speaking of “mayors”, in the applications category we have consumer-oriented systems to solve a particular existing problem or create some new demand. For example, Bitcoin. When attempts to use it as an infrastructure became rare (Rootstock experiment aside), it is now just a great monetary/payment hybrid system app. It doesn’t make its investment appeal any smaller. It is slowly and, I hope, temporarily sliding down to a simplified niche of “new gold”, but that doesn’t take it out of the app tier.

The problem with applications is that most of them come with the encumbrance of a “native coin”. I used to love the Brave browser’s take on the obnoxious ads, ad-blocking, and counter-ad-blocking issues, last year, when the team promised to operate in money, i.e. bitcoins. But Brave is nothing unique or special; now, with this BAT launch, most people (including myself) will just use straightforward-thinking alternatives (which will be plenty). The same is true for any application, nothing is unique. The “decentralized” feature doesn’t protect anything from competition. There’s no property or quality of a non-infrastructure application capable of justifying the monstrous complexity of “inner currency”.

I theoretically understand the idea of an application supported by its own economics, monetary and even fiscal policies. The idea is great, but it is more complex economically even than the pre-monetization social networks used to be, and there we needed over ten years to figure out the correct revenue models. So far, very few people on the planet can seriously defend a thesis about how to value a cryptocurrency fundamentally. And I guess none of them is wasting our time launching new ICOs.

So, before we invest in such things, do we observe a working example of a successful application with its own economy, one besides Bitcoin? I guess we don’t (sorry, decred, I still love you) and, for now, native app coins remain a plain burden. A handful of “alternatives” for Bitcoins were good at selling hypes, being a hedging tool, Litecoin even went as far as testing the grounds for the scaling tech, but none of them actually delivered the “execution” as we understand it traditionally. They didn’t even find a way to appeal to the new “silkroaders”.

Non-finance apps look even more miserable. Steemit users suppose steem token is undervalued — it only grew twice in the course of the last five weeks. But did steemit show user acquisition dynamics at a superior level to incumbents at any stage? Probably not. I tried to use it too and it’s a disaster, even without the context of competing, say, with Medium. And that’s probably the most prominent project in the long term.

Generally, up to this point, on the ninth year of Bitcoin existence, blockchain-ized [through money-like tokens] apps didn’t prove to do their job any better than incumbents, except for Bitcoin, which strongly outperforms in some parameters and significantly loses in others. But Bitcoin’s money-like token is money, after all. In short, distributed apps don’t fly yet. That wouldn’t be much of a problem — we can wait — if not one circumstance. Only the operational success can save the project starters in the future and they can’t really wait for too long. A no-success outcome soon means their legal prosecution, maybe fuzzy in its terms but nonetheless a troublesome thing.

I believe, to be a “legit” investment opportunity, distributed apps have to have sold a “normal” digital equity. And if they need in-system payments for functioning they should use broadly accepted money such as bitcoin or fiat currency. If they need some sort of distributed calculations through processes that involve some tokens changing hands, there’s no particular need to charge investors for that. And those who brought their coins up just to deceive capital market regulators deceived their investors as well. (Actually, it’s investors whom they deceive in the first place.)

I’m addressing app-coin-type ICO runners now: here’s the worst part of all — you guys deceive yourselves.

You must have carefully studied one or two papers on securities law framework for blockchain tokens circulating in the community. Those papers are sly. The statements there were never tested in court. Those papers taught you how not to look as a security fraudster. But you perfectly know: what you sell IS a security. Complex language and technical jargon from white papers cannot hide it. Disclaimers will not protect you once you’re engaged in securities fraud. The “not for US citizens” remark, if not honestly enforced by yourself, is not a restriction but a duty you broke before any funds collected. Once the disappointment reaches the critical mass, regulators will come after you sooner or later. (You sense that somewhere in the back of your head.) Open the list of upcoming ICOs and count the share of project leads whose last names end with “chuk”, “ko”, “ov”, “in”, or “ich”. It’s going to be more than half. You know what’s funny? These people are united by the home country that keeps Mr. Snowden safe from the law enforcement.

In reference to DAOs, you can legalize it if you really want by tethering tokens to legacy SAFEs or SARs. It might be expensive, inconvenient and it may limit the functionality, but it is doable. In the case of an app coin you are facing a legal dead end for sure. First of all, the chances to avoid complaints from angry investors are null, so the deadend means there won’t be any law to protect you. And remember, you don’t have Ethereum’s reputation, community support and a non-profit fund in Zug, Switzerland to withstand the pressure when it comes. I’m not a lawyer to benefit from fear mongering, I’m just telling you what’s pretty obvious for a lot of people in the community (actually for anybody who’s over forty).

Dear app creators, because you are too lazy to comply, you contaminate the entire ICO space. Please abstain from selling us “native” app coins; launch honest DAOs, sell Ethereum tokens and no questions will be asked. Imagine what would happen if all that energy you put into justifying an app coin be used to polish the transparency and mechanical perfection of your management processes. The crypto space now invites more and more late adopters. They don’t give a shit about consensus mechanisms, they would rather see your organization function well, in accordance with common sense.

[3 of 4] Middleware

This segment is something in between the two above. For example, storage, identity, privacy or even access to the Internet are the examples of services that may be required by various distributed applications running on top of different “infrastructures”. This hybrid position gives middleware projects greater “moral rights” and flexibility. They might as well run a native coin that makes sense, which really depends on the particular case and the system.

Great examples are district0x, Colony and Aragon: one can’t do what they do without blockchain and, on the other hand, other blockchain businesses truly need their services.

The subspace is underpopulated. I would love to see more projects here. This sector is by far the most legit and meaningful.

[4 of 4] Capital

Financial projects can also be “distributed”, “trustless”, and have their own blockchain token. So far, we have mostly unregulated “hedge funds”, but there’s a surprising variety including AI-based trading helpers. Please don’t confuse capital with finance — there are great projects like Decred that fit into App tier. The price of such token should depend little on the technology implementation itself, but rather on the set of underlying assets. Of course, there has to be a coin to represent a distributed fund unit but, I suppose, capital market projects MUST be transparent DAOs since there’s nothing in there but the management process. I would feel much more convinced if a fund used an existing professional distributed management and collaboration platform so asset managers do their thing and don’t worry about the rest.

But generally speaking, I don’t feel the community needs this sort of service yet. It’s premature. So far, the purpose of non-legal capital services remains unclear. They don’t open new markets like ETFs. They don’t provide any traditional risk management or insured protection. They don’t have any track record yet to trust their management’s judgement.

Zones of Comfort

At the hazard of wearying you, this tale of emotions must have the epilogue of yet another discourse on space geometry.

Although a hollow cylinder world is great in many aspects, it’s not obvious how to make a perfect blue sky — through the clouds, one can see the distant opposite side, which is a grey and green land. One solution is to give up about half the space and make the too-dangerous-to-sail ocean of sky-blue waters. The perfect fairytale theme-park world should not have looped, Christopher Columbus style paths anyway. There has to be an uncrossable sea in the West and impassable mountains in the East. The inner surface of a cylinder is a perfect, border-walled rectangle if you place mountains on the end faces and along one coaxial plane. The coastal regions must have hills, walkable but very foggy so one never sees a strange sky with a mix of the ocean and land. Thus, zoning can provide the comfort of the familiar world for all rarely traveling locals and great range of varieties and a whole deal of strangeness for those who are interested in professional adventures.