Investors of crypto-assets are easily affected by movements of crypto-assets’ prices. Typically, one cheers when the price soars, and laments when the price plummets. Earlier last week, the prices of Bitcoin and Ether have slipped to US$1,863 and US$136 respectively, a decline of approximately 26% and 43% from the week’s high of US$2,535 and US$242. Due to the drop in prices, the cumulative market capitalization of all blockchain companies fell to less than US$70 billion at its lowest, down from US$115 billion from a month ago. That being said, if one bothered to ask around, one would learn that most investors are still bullish about the prospects of Bitcoin, Ethereum and blockchain in general. So why the significant drop in prices?

The Rise

Before we examine the possible explanations for the price drop, let’s review what happened in the blockchain space earlier this year, particularly in regards to Ethereum and other decentralized applications (dapps) that are built on top of the Ethereum protocol. Ethereum price started gaining momentum back in March, when the Ethereum Enterprise Alliance (EEA) was introduced. Towards the end of the month, Ether was already approaching US$50. The price of Ether continued to increase thereafter, but saw its major breakthrough in late May, during which a series of ICOs such as Cofound.it and BAT were announced. By then, the price of Ether had already shot past US$150, and the price was propelled further upwards by the advent of several other notable projects, closing in at around US$400 briefly in mid-June.

While the sensational increase in the prices of major blockchains in the first half of 2017 might have happened sooner than many had expected, it was not uncalled for. The price increase is an indication of the community’s acceptance of Ethereum as a blockchain protocol, and a recognition of Ethereum’s versatility to accommodate many different types of dapps. As more Ethereum dapps and their ICOs emerge, the depth and breadth of Ethereum as a protocol will be further enhanced, bringing real utility to the network.

The Fall

It all began when the rumours of Vitalik’s (the co-founder of Ethereum) death circulated in the media. The Ether price fell from US$329 to US$284 that day and continued to slide downward to about US$250 before bouncing back up to the US$300 region a few days later. One of the reasons why the price sustained at sub-300 range despite the dismissal of the death hoax by Vitalik himself was because of stop loss orders at various exchanges. When the price of Ether dropped as investors released part of their Ether holdings due to panic, a series of orders filed at lower prices were filled, thereby reinforcing the order cycle until the order prices were modified by individuals.

Additionally, the fall in price could be attributed to a surge in the supply of Ether in the market, as organizations that had raised a significant amount of Ethers from their respective ICOs liquidated some of their Ethers to fund development and hire talents. It is also important to note that some of the biggest and most successful fundraisers recently are poised to be competitors of Ethereum in the long run. Given their significant Ether holdings, they are capable of disrupting the price of Ether, since there is no incentive for them to keep the stability of Ethereum.

The Reality

As with any nascent sector, the blockchain ecosystem faces much uncertainty related to regulatory and technological developments. For some of these dapps, many still question their utility and impact since most of them are still in the early stages of development. With unproven business models that are only enabled by the recent invention of the blockchain technology, as well as the limited benefits across sectors, non-blockchain firms are still reluctant to commit large amounts of resources to blockchain investments. Even fewer have embarked on large-scale initiatives designed to transform and improve the efficiencies of their business operation.

However, the relatively reserved attitude towards blockchain might soon change. According to a survey to gauge public’s interest in blockchain published by Coindesk earlier this year, it was reported that a growing number of traditional companies were slowly becoming more receptive to blockchain, exploring it as a solution to some of their business challenges. Many of the respondents viewed the blockchain technology as a positive addition to their respective sectors, as it would bring about newer opportunities and democratize trust to promote greater inclusion of the masses.

Moreover, the spectacular growth of the total value of crypto-assets and the increase in the number of ICOs recently are telling signs of surging optimism for blockchain companies, as more people become bullish about technology’s prospect. Interestingly though, more people seem to agree that crypto-assets can challenge global reserve currencies.

So, could it be that the advent of crypto-assets marks the convergence of our reality to the ideals that Hayek so fervently advocated?

The Economics

In many ways, the price activities of crypto-assets closely resemble that of Hayek’s school of thought, because government intervention in the blockchain space is relatively minimal. This also means that the entire ecosystem is subject to uninterrupted market forces to determine the prices of crypto-assets. Generally, current prices of crypto-assets are a reflection of the market’s expectation of their applications and practicalities. Since now is only the beginning, the uncertain future demands and the deterministic supplies of each of the crypto-asset typically result in highly volatile prices that deter people from using them as a medium of exchange.

For a blockchain to maintain its growth and stability, a low volatility rate is crucial. It is not hard to imagine that merchants would prefer to be paid in a currency that could retain most of its value after a transaction, because it is easier to anticipate sales and allocate resources to expand businesses. Similarly, a stable and growing Ether price is essential to ensure that Ethereum remains attractive for developers to build projects on top of the Ethereum protocol.

The Environment

The growing Ether price has made Ethereum attractive to developers, as it presents a great opportunity for developers to raise capital to fund their respective businesses. They assemble capable and talented people, and as a team they design creative blockchain solutions to some of the problems in our societies. Naturally, the continual expansion of the ecosystem through the establishments of new and interesting projects give crypto-investors, especially those who have made serious returns from their earlier bull-run with investments in Ethereum and several other dapps, more options to diversify their portfolio and grow their fortune.

Also, despite being questionable in the blockchain ecosystem still, the price stability of a crypto-currency is likely to be another major draw for developers because it can be very reassuring amidst the dynamic and ever-changing nature of businesses. Price stability contributes to achieving high levels of economic activities by improving the transparency of the price mechanism, and allows consumers to make informed consumption and investment decisions. If we can achieve this collectively as a sector, then we can be certain that it won’t be long before the blockchain technology can be integrated fully into our daily lives.

As more projects join the Ethereum ecosystem, more tokens will be released into the market. In anticipation of the increase in number of crypto-assets in the market, there needs to be agents to facilitate conversions and exchanges of tokens in order to improve the liquidity of these crypto-assets. This is why the role of KyberNetwork is important, as it would help contribute to the much needed price stability in the ecosystem.

The Role of KyberNetwork

KyberNetwork will address the low token liquidity issue with its new model that ensures seamless and secure conversion in a single transaction with guaranteed liquidity. Specifically, KyberNetwork leverages a set of reserves in our platform that will provide liquidity and process all the trades. Hence, users can perform trustless and block-instant conversions for their tokens, i.e. the conversion is done immediately once their transactions have been included in any block.

The seamless and secure transactions enabled by KyberNetwork also make KyberNetwork a good payment system. At KyberNetwork, we recognize the importance of an efficient payment system, as it is the most fundamental layer that facilitates value exchanges within an economy. The absence of which would result in disorderliness and instability of a market, as consumers might exploit loopholes to make illegal trade payments and evade taxes.

There have been a series of announcements of blockchain projects that specialize in bridging traditional economies and the blockchain economy. KyberNetwork’s main proposition in this sector allows a sender to send money in one currency or token, while the recipient receives in another desired currency or token, thus enabling a wider class of users and receive contributions and payments from any token that the platform supports.

The Possibility

The world that we live in and the blockchain space are more connected than they seem. As private currencies, crypto-assets are a good means to transfer monetary value from one object to another. Yet, as individuals of a community with policies and practices that are so embedded in the roots of our society, we still have to rely on economic fundamentals to perform everyday tasks. As such, it would be naive to assume that private currencies can completely overtake the current role of government backed monies. Considering the relevance of each currency type in separate and non-overlapping contexts however, it is not absurd to regard the possibility of these two types of currencies having their distinctive roles in our economy simultaneously.

In the not too distant future, we should have a clearer picture of how private currencies and government backed currencies co-exist. Already, there is a growing adoption of public monies in the form of crypto-assets, albeit such currencies are relatively unregulated. Addressing the functions and uses of private monies within our societies may be challenging because they are a new force that transcends beyond borders, governed not by one central figure but the entire network. With such broad coverage, the government cannot afford narrow focus that would limit them from taking advantage of the benefits that the blockchain technology promises.

Final Thoughts

Are we hopeful of blockchain because blockchain is promising, or is blockchain promising because we enjoy the notion of it in our society? Surrounded by so many different blockchain protocols, we may ask why our desire has chosen to settle on this particular protocol or this particular company; why an approach to tackle the supply chain issue has come to answer so precisely to our criterion of perfection. Every team offers different solutions to the problems that we face, yet succeeds in redefining our notions of attractiveness in a way that is as original and as idiosyncratic as the blockchain landscape.

Who knows exactly what would happen in the future? We can only anticipate based on calculated predictions like we always have, and pray that we are right about the changes that our society will undergo.

This blog post is co-authored by TN Lee and KyberNetwork’s Executive Advisor, Leng Hoe Lon.

*poster photo is courtesy of gongxiangcj