Like any new market, the birth of the ICO market has brought with it an enormous amount of noise, messiness, and raw speculation. Armed with little more than a hunch, early investors seem to be all in, even with the most preposterous valuations. From the outside, such investments look reckless, “irrational”, even fraudulent. They are met with derision and finger wags from regulators and the pillars of the financial establishment.
Yet ICO investors are pioneers — technology wildcatters — willing to take on enormous risk with very little data; willing to take long odds on the hope of hitting it big. Go big or go broke. There is a technology sea change on the horizon, and they want to be part of it. Given the rapid appreciation of many crypto-tokens, their exuberance may not seem so irrational.
An argument can be made that “reasoned speculation” is not “irrational exuberance” but a necessary cost of entry into a discontinuous technology era. One may not be able to call the future success of a specific IOC or token, but to the technology wildcatter, it is a good bet that as a category, a portfolio of bets, crypto tokens are sound investment and here to stay. What could be bigger than the reshaping of the global economic, financial, and monetary system?
The current deluge of ICOs is the natural consequence of the market exploring the potential of profoundly disruptive technologies and protocols. The subsequent, inevitable cleansing, rout, and Darwinian culling of less viable crypto tokens is the market resetting itself and starting to establish new signals. It is doing so with explosive speed and a total disregard for tradition and precedent. It is the quintessential Schumpeter paradox of “Creative Destruction.”
Crypto 1.0 — the originalists
The foundational and unifying force behind the crypto-token explosion is a vision of a wholly decentralized — autonomous — peer-to-peer network of trusted/trustless services, where there is no central control, no capture by special interests. Bit Torrent for currencies! A vision of an autonomous state where authority is inherently decentralized and algorithmic.
This is Crypto 1.0, where arguments and architectures are still framed by the Satoshi Origin Myth and its core tenants of Proof of Work and Proof of Stake consensus, Shaw 256, permissionless over permissioned access, and public over private blockchains.
There is also room for “smart contracts” written on the Ethereum Blockchain, but at significant costs and with performance issues. Given that lucrative fees that can be made from mining Bitcoin and Ether, not surprisingly, the mining of coins is seen as the sacrosanct incentive mechanism for keeping the network permissionless and trustless. For the founding group of miners and coin holders, there can be no divergence from the original Libertarian framework of Satoshi; there is only Crypto 1 and its subsequent upgrades and improvements.
Then there are those who have to deal with reality.
Crypto 2.0 — the pragmatists and reformers
Pragmatists understand that there are a number of considerations you have to deal with when launching a new token or blockchain that Satoshi didn’t account for: white lists, KYC/AML, privacy, fraud, security, transaction performance, storage, scalability, resilience, recovery, customer experience support, and interoperability. These pragmatists are working with side chains, private blockchains, and master nodes, trying to design trusted exchanges and secure, user-friendly wallets. In doing so, this group is providing alternative solutions that challenge some of the Bitcoin and Ethereum orthodoxies.
As blockchain applications and services have become more mainstream, the locus of innovation is turning towards smart contracts and exchangeable “smart tokens.” Rather than being subject to the uncertainties, bubbles, and manipulations of markets, a new generation of tokens is being designed to adapt or adjust to changes in order to preserve some state, such as price stability, adjusted risk, diversity, or liquidity – or all of the above. This is something that is inconceivable under the current economic, financial, and monetary system. But machine learning, real-time data feeds, programmable contracts, and adaptive algorithms make it feasible to design token protocols that are self-regulating financial instruments. As a result, we could see “stable” coins that can resist volatility, level out pump-and-dump schemes, and preserve liquidity. And we could see “smart” baskets of tokens — much like ETF (Exchange Traded Funds) — that can buy and sell different types of tokens to preserve some desired outcome.
Adaptive protocols are the self-correcting programs that control the exchange of different types of tokens in order to maintain a certain range of outcomes or “homeostasis.” These protocols could avert classic market failures. Instead of using a uniform market pricing mechanism that loses information diversity by collapsing dimensionality into a single price function, tokens can be designed to reflect various dimensions and values to control for overall stability.
This problem is very similar to the one robotics and autonomous vehicles designers recently overcame: How do you stabilize and direct autonomous behaviors or outcomes with massive amounts of incomplete, diverse, and highly variable real-time sensor data? This problem has effectively been solved through the evolution of open source libraries sponsored by DARPA for autonomous vehicles and the open Robotics Operating System (ROS) to the point where autonomous vehicles are a near-term commercial reality and Boston Dynamics robots can now perform complete backflips.
Real AI and an end to bubbles
AI programs can control their behaviors to preserve certain outcomes under conditions of extreme uncertainty and volatility. The Achilles Heel of AI has long been its “brittleness”; you couldn’t program it for things and events it had never seen. That is no longer the case, and that is monumental. Imagine being able to design, dare I say, “derivatives” that are not instruments of mass destruction but verifiable, stable instruments of mass affluence for preserving dynamic ranges of liquidity, solvency, and risk.
What makes something truly intelligent is that it learns from its mistakes. Markets don’t do that. They runaway until they crash and burn. There is no feedback, no learning from past experience, and no way for immediate correction. That is where the “creative destruction” comes in to the detriment of all but a privileged few. When the dominos of default and counterparty failures start to tumble, those with privileged information and resources go into self-preservation mode and offload the risks and costs onto the unsuspecting and the less powerful. This has been the boom-and-bust curse of capitalism and markets since its inception. This need not be case for next-generation financial systems.
We are seeing a generation of crypto 2.0 tokens, protocols, and platforms emerge that are grounded in addressing high value real-world application. Expect to see more kinds of tokens that address identity, trust, reputation, privacy and KYC/AML and other issues that are immediate and pressing to the build-out of a new global financial and economic system.
The imperatives for global financial reforms will almost certainly vastly accelerate the adoption and innovation in crypto-tokens and other decentralized and smart technologies. Expect this transformation to happen sooner than you might imagine. In this new world, AI tokens and protocols will provide verified market signals of utilization value. Finally, math, algorithms, and evidence will replace sorcery, speculation, and wanton waste and manipulation. And that should accelerate our path to a sustainable and more equitable global economy.
John H Clippinger is a cofounder of Token Commons Foundation, the issuer of the Swytch token, an advisor to Bancor, Crypto-Assets Design Group, Atonomy, Cashaa, Decentralized Pictures, DCP, Skycoin, and Evident Proof, and a research scientist at MIT Media Lab.