Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor of blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in Consensus Magazine, distributed to attendees of Consensus 2018.

If, during CoinDesk’s Consensus conference in May 2017, I’d predicted the crypto and blockchain industry’s subsequent experiences, you wouldn’t have believed me.

Back then, CoinDesk’s Bitcoin Price Index (BPI) was around $2,400. Six months later, it passed through $10,000 – right when 1,300 investors and financial professionals attended the inaugural Consensus: Invest conference. But that was only a way station to $19,783, an all-time high in mid-December.

This came as the Chicago Board of Trade and the Chicago Mercantile Exchange launched bitcoin futures contracts, giving professional entities a vehicle for betting on the cryptocurrency. Come 2018, the entire mood shifted. Bitcoin lost two-thirds of its value in less than four months as regulatory clampdowns in China, South Korea and the U.S. ensued.

Bitcoin was not alone in this volatility, either. In the eleven months following Consensus 2017, $8.3 billion was raised in initial coin offerings, according to CoinDesk’s ICO Tracker. At its peak in early January, the market capitalization for all cryptocurrencies and digital tokens listed on coinmarketcap.com surpassed $831 billion, a 900 percent rise from May 2017. As Consensus 2018 wrapped up recently week it was $375 billion.

With all this money being made and lost, and the “What the hell is going on?” questions it provoked among the general public, bitcoin, cryptocurrencies and blockchain technology were thrust into the headlines. Suddenly, they were topics of conversation at dinner tables. Mothers were asking their crypto-obsessed teenagers what coin to buy.

And those of us who’d floated around the space for some years were looked upon with intrigue: Are you one of them? A bitcoin billionaire? (For the record, I most decidedly am not.)

This level of public curiosity was totally new. But the market mania wasn’t, not for crypto. Ratio-wise, the BPI chart of 2017–2018 looks similar to the 12 months from April 30, 2013, when bitcoin started at $144.30, soared to $1,151.30 on December 4, 2013, and then slid to $445.87 on April 30, 2014, where it more or less stayed for the rest of the year. The same goes for the calendar year 2011, when the price started at 30 cents, peaked at $29.60 on June 8, and then closed the year at $4.25.

I believe we were in a bubble in 2017, but we were also in one in 2013 and in 2011. In those two cases, recovery to higher highs came much sooner than it did for, say, the Nasdaq, which took 15 years to top its dot-com bubble peak of March 2000. The crypto markets may be redefining the nature of investment booms, speeding up the entire process of speculation, correction, retrenchment and recovery.

Under the hood

Price, though, is a distraction. It makes people miss the forest for the trees, overlooking the important innovations on which the investment ideas are supposedly founded. So, we must note that amid all the money mania, big changes were also occurring with the development of crypto technology itself.

In that same 12-month period, the bitcoin community’s three-year internecine war, otherwise known as the “block size debate,” came to a divisive conclusion with a software hard fork to create bitcoin cash, a new, competing version of bitcoin with a larger block capacity. That left the community that supported the original small-block standard, now known as Bitcoin Core, free to incorporate code changes of its own. Most importantly, the Segregated Witness (SegWit) protocol upgrade was introduced, which streamlined data management and enabled other software improvements.

In particular, SegWit facilitated one of the most exciting cryptocurrency innovations since Satoshi Nakamoto’s white paper: the lightning network. Now live on bitcoin, litecoin and other cryptocurrencies but still in its infancy, lightning is an off-chain payment channel solution that promises to significantly increase transaction-processing, enable derivative-like smart contracts, and lower costs.

Not to be outdone, ethereum developers introduced their own scaling initiatives. These included the lightning-inspired Raiden and Plasma, which aimed to enable smart contracts at massive scale. Meanwhile, new projects from Polkadot, Ripple and Cosmos and others sought cross-blockchain interoperability while still more worked on decentralized exchanges for custody-free token trading.

Meanwhile, businesses, NGOs and government agencies launched blockchain projects covering a smorgasbord of use cases. Almost every day a new private or public collaboration was launched for supply chain management, digital identity, land titles, trade finance, commodity exchanges, decentralized electricity or additive manufacturing.

The UN, the IMF and the World Bank set up blockchain labs. Consortia comprising established companies, startups and even state governments and cities were formed to explore open-source standards in energy, climate data, and the internet of things. People everywhere were striving to make blockchain go live.

Many of these ideas are ahead of their time, mostly because the underlying infrastructure, the protocols and programming rules that govern platforms such as bitcoin or ethereum, aren’t sufficiently developed for them. That they are being proposed puts pressure on core blockchain developers.

Unlike the mostly academic and publicly funded founders of the internet, who worked for decades in relative obscurity before their work on packet switching and the Transmission Control and internet protocols was ready for the online boom in the nineties, blockchain developers are in the spotlight. The world is already demanding applications while highly speculative crypto markets want returns on their money.

Having hundreds of billions of dollars at stake does not make for an ideal, tranquil environment for testing and developing software.

Still, developers have no choice. Like it or not, the ecosystem is coming together at once rather than in sequence. Programmers and cryptographers are working on cleaner code, designing smarter security solutions and installing faster transaction mechanisms at or on top of the base protocol layer, while established companies and startups are rolling out smartphone products at the higher, application layer.

All this is occurring as day-traders flip in and out of multiple crypto tokens, creating huge, distracting gyrations in the developers’ own net worth.

Out of this chaos, order will eventually come. It will partly be forced by regulators like the Securities and Exchange Commission, which will set rules and enforce them, hopefully without killing innovation.

Order will also come from the community itself, driven by the demands of the market. We need best practices for token-issuing startups, software audits and other quality assurances, and self-regulating governing bodies to encourage standards, adjudicate disputes and disincentivize wrongdoing.

Welcoming the bubble

Although the hysteria ensures this industry’s development won’t chart a methodical straight line, the crazed market need not be viewed as a negative phenomenon.

Throughout history, the arrival of transformative technologies has been accompanied by Wild West-like speculation. It happened with electricity, with railroads, and with the internet itself in the 90s.

As the economist Carlota Perez explains, speculation and bubbles are not just a byproduct but are core feature of how new, disruptive technologies are developed, deployed and ultimately incorporated into our economy.

Speculation unlocks cheap capital. Much of it just lines the pockets of early investors in crazy, overvalued proposals such as Pets.com in 1999, but it also funds real, valuable infrastructure.

In the dot-com bubble, money went into physical infrastructure: fiber-optic cable, giant server farms, research into 3G mobile technologies. People lost billions on silly ideas in the nineties but their money also paid for the infrastructure that would underlay internet 2.0 post-bubble. It enabled algorithmic search, cloud computing, smartphones, social media, big data and all the other functionality that have changed our way of life and made a few titans of tech fabulously wealthy and powerful.

What’s the equivalent now? The capital unleashed by the crypto bubble isn’t funding physical infrastructure but social infrastructure. Token valuations might be out of whack with reality and imply big losses for many. But they’re also incentivizing global groups of innovators to come together online, conceive of new decentralized economic models, and codify those ideas in open-source software.

Their startups may fail but their code will be freely available for others to later work with, even more readily and cheaply than the dot-com era fiber helped Google, Facebook and co. in the 2000s.

We don’t know what new innovations will emerge, but it’s fair to say these early innovators are laying the building blocks of our future, decentralized economy.

The big idea

At times like this, there’s a broad understanding that something big is happening. It’s just hard to predict its economic impacts. So people throw scattershot money at everything. Inevitably, their bets overshoot and prices decline. That this is going on in crypto is perhaps vindication of the underlying technology’s importance.

This raises some fundamental questions: What is the paradigm shift, the big idea that breeds such excitement? Why, after almost ten years is the market assigning $144 billion of value to a digital asset based on a software system that no one controls? What’s so special, anyway, about a decentralized, censorship-resistant system of value exchange?

The big, underlying idea, I believe, is that blockchain technology can upend not just the business models of recent decades but a millennia-old societal practice of deep significance to civilization.

Its decentralized structure portends a profound change in ledger-keeping, a dramatic re-imagination of society’s methods for tracking and assigning value. It overturns the centralized model installed with the first ledger, the Code of Hammurabi, which was founded around 1754 BC in Babylon.

It’s hard to overstate how important ledgers are to our way of life. Without bookkeeping, modern society simply couldn’t function. We’d have no idea of who owes what to whom and of how much value to assign to the assets of individuals, companies and entire economies.

It’s how we overcome the core challenge of mistrust among strangers, the means by which we reach agreement on sets of facts and make exchanges of value. This is the stuff of civilization. Anything that transforms this function is, by definition, extremely important.

Until now, we’ve had to rely on centralized ledger keepers, essentially requiring us to trust the say-so of those who control the books. We’ve assigned regulators and auditors to randomly check their work, but for the most part we are blind to the accuracy of the data, beholden to what the bookkeeper tells us.

This siloed recordkeeping results in a “cost of trust” that takes many forms. One is found in financial crises, such as that of 2008, when society lost faith in the ledgers produced by banks such as Lehman Brothers and the Royal Bank of Scotland.

Another is less obvious: the endless work of millions of accountants at businesses around the world, each reconciling their company’s books to those of their counterparties. Why? Because they don’t trust each other.

Blockchains promise to supplant this centralized approach with a distributed, shared ledger whose updates follow a robust, ongoing consensus in real-time. At any given time, everyone who’s with access can know the current state of agreed-to transactions and balances. No more need for weekly, monthly, quarterly, or annual reconciliations and audits. The entire rhythm of our financial system could change.

And it’s not just financial data. Valuable information of all kinds can be tracked in this decentralized manner. It includes the online data that defines digital identities, titles to assets, and compliance information. It could disintermediate middlemen of all stripes because, by having a decentralized algorithm resolve our mutual mistrust rather than depending on all-knowing centralized ledger-keepers, we can trade directly with each other. When this system is reliably attached to trusted devices in the internet of things, it could even allow for machine-to-machine trade.

Such a transformation points to unimaginable new efficiencies. It could create untold new forms of value. And it could massively disrupt existing businesses and jobs.

These prospects have stirred a hive mind of dreamers and fueled an unprecedented bout of economic speculation. We don’t know where it’s headed. But we sense something profound is afoot.

Blockchain is a software technology, but its sweeping potential has fostered a giant sideline industry of speculation and ideation. As the technology “goes live,” this hurly-burly process of creative innovation and destruction will only intensify.

That’s both exciting and daunting, but it poses massive potential payoffs. Join us for the ride.

Fractal form and math image via Shutterstock