Competition On and Off the Blockchain

And the Absurdity of the ICO Market

The goal of blockchain purists is to decentralize everything, from social networking to job recruitment, from banking to the entire world wide web. Put Central Park on the blockchain, decentralize the park! Some of these ideas have merit, especially those in which a chain of trust is essential to the functioning of the industry (payment transaction is an obvious example). For most companies engaging in ICOs however, the act of simply decentralizing an existing technology does not inherently make their product more attractive in a competitive marketplace. Many ICO whitepapers attempt to meticulously outline how their internal economics will work with the native token yet fail to mention how external economic factors will affect pricing and competitiveness. As much as enthusiasts wish it were true, decentralized blockchain technologies do not exist in a vacuum, they still must compete with “real-world” companies offering traditional services paid for in traditional money. Therefore, market viability for most decentralized applications must consider both competitors inside and outside of the crypto space.

This Price That Price

In the oft-mentioned paper from the Bank of Canada On the Value of Virtual Currencies, the authors make a key assumption:

We assume that the prices of goods and services expressed in virtual currency are completely determined by the exchange rate and their price level in the traditional currency

Many utility tokens exist as sidechains to the Ethereum blockchain so there are two levels of exchange from a traditional currency to obtain these utility tokens. Following this assumption, the price of goods in a utility token is determined by both its exchange rate with ETH and the ETH-USD exchange rate. As the levels of detachment from traditional currency increase, it seems to me that the ability for the ETH-USD exchange rate to determine prices on a particular side(-side-side-side)-chain is non-existent. I believe the assumption made in the paper only holds when paying with Bitcoin is an option alongside paying with dollars at some online store.

Finding any information about pricing for a blockchain-enabled service is nearly impossible. Storj is the only major player that lists prices and it is, oddly, in USD. Many services are probably wary of even estimating what prices they can offer given that the value of the token itself in dollars is constantly changing. If prices denominated in a token are fixed, then appreciation of the token’s price-as-an-asset makes dollar prices go down, but also means that previous customers pay more than new customers. If, as the paper mentioned above states, prices are fixed to their dollar cost then there is the difficulty of calculating the token cost of a good/service through multiple levels of exchange. The latter option seems anti-crypto since the end goal is presumably to go all-in on crypto and not need to denominate anything in dollars. The former option results in difficulty competing with non-blockchain services due to the lower future price issue. The lack of pricing information is unsettling given the amount of money invested in some of these decentralized platforms but unsurprising given the lack of accountability inherent to an ICO. It will be interesting to see the pricing strategies when products launch, and if teams begin doing this research early in the process.

Decentralize It!

Pricing is only one way blockchain applications will compete with traditional services but it is likely the most important. Decentralization results in cutting out the middle-man (middle-person?) and lower transaction fees that cannot be matched in traditional payments. Centralization provides values in certain situations; social networks provide curation algorithms from a trove of data, journalism websites provide staff writers. The idea of putting everything on the blockchain is flawed because not every platform benefits from decentralization aside from its payments system. For instance, the Basic Attention Token claims to be able to better-target ads based on user browsing as measured by their built-in-house web browser. Competition in this space is, obviously, Google and Facebook who also have browsing habits and profiles on users based on data given to them by those users and sophisticated machine learning. It is unclear how BAT can offer more targeted ads than the industry leaders when centralization (of data) is the reason these companies can offer targeted ads. The hope, of course, is that users will use the BAT browser simply because it is a decentralized application. This is the unique proposition of all blockchain apps, is that they are decentralized and people will (should) use them for that reason alone. That will not cut it in a market where dApps compete with regular, established apps.

There is a class of applications to which much of this does not apply. Applications that only exist because of the blockchain such as Status or those that aim to alter how the blockchain works, like Tezos. These ICOs still suffer from the same lack of accountability as any other, but there is no off-blockchain competition for Tezos to worry about.

Smoke Screen

For most ICOs these days, its a lack of information and research into the market viability of a service that is most concerning. Pricing is never mentioned in whitepapers and the service is often thought to exist in a vacuum, safe from any competition. As developers make out like bandits regardless of whether their service is successful in the market, or even launched, there is little incentive for teams to do any research into what challenges they may face. This is of little importance currently as the attraction of an ICO is solely based on whether the token can be held as an investment rather than for the utility it is meant to provide. If the ICO market continues to go this way, the industry is due for a reckoning where services will fail to launch, or become complete flops on the market, and the utility value of these tokens will go to zero. Whether that will result in the token-as-an-investment to fail as well will remain to be seen and is certainly not inevitable given the absurdity of the ICO market.