Financial Times: What has Silicon Valley's ICO bubble produced?
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Financial Times: What has Silicon Valley's ICO bubble produced?
The dot-com bubble era produced a handful of big winners, including Amazon and Yahoo. The survivors of the ICO bubble still have a long way to go to prove they possess similar staying power.
Navigating Web3 tides with focused insightsAuthor | Richard Waters
Translation | TechFlow
Three years ago, when blockchain startup Filecoin raised $257 million, promising to build a decentralized data storage market, it looked like a classic example of the frenzy sweeping the cryptocurrency world.
At the time, investors poured $20 billion into so-called initial coin offerings (ICOs), projects like Filecoin that claimed to be building significant new digital infrastructure—many of which have since vanished into silence, and ICOs quickly fell out of favor.
But in recent weeks, the Filecoin market has finally begun to shine. According to project founder Juan Benet, people eager to acquire its token have contributed a combined storage capacity of 1.3 exabytes—an exabyte equivalent to 500 times the data stored in all U.S. research libraries.
Juan says demand from customers wanting to buy storage remains only a fraction of what’s possible, but Filecoin’s primary goal was to attract capacity—and progress is tenfold higher than expected.
Filecoin’s network activation is part of a small wave of blockchain projects funded by the ICO bubble that are belatedly coming online, having set out with grand ambitions to transform internet infrastructure.
Polkadot, a platform others can use to create their own blockchains, is about to complete a phased rollout of its network. Other projects, such as Cosmos—which offers a way to connect different blockchains—and Tezos, an “intelligent contract” competitor to Ethereum, are already live.
Founders of some of these projects acknowledge their ideas benefited from the tide of financial speculation. Gavin Wood, Polkadot’s founder, says most of the money that flooded into ICOs in 2017 represented recycled profits from investments in Ethereum (of which he was also a co-founder) and Bitcoin.
“Ultimately, I think many people saw it as compounding bets,” Mr. Wood said. “They made a lot of money on Ethereum, and they wanted to see if they could keep going.”
Yet he and other crypto entrepreneurs claim the technological innovations of the few survivors will prove more enduring than the financial mania surrounding ICOs.
“These projects have built something quite significant,” Juan said. “If you look at other technologies, I don’t think the total capital raised over the past three years via ICOs is abnormal.”
While some blockchain networks are now live, the applications they support remain to be developed, making it difficult to judge their ultimate impact.
For example, the Tezos blockchain is designed for “any place where you’re trying to create a digital economy,” such as in-game purchases in video games, says one of its founders, Kathleen Breitman.
Other potential uses include the online “creator economy,” says Alison Mangiero, president of TQ Tezos, where individual artists, performers, and influencers could benefit from “cutting out intermediaries and finding ways to monetize their fan base.” She promises such applications will start emerging in 2021.
Meanwhile, the recent rise of DeFi (decentralized finance applications that remove traditional intermediaries) has drawn attention to the blockchain platforms that can support them.
Polkadot has been one of the main beneficiaries of developer interest: its platform for interlinking blockchains is well-suited to DeFi, supporting numerous simple applications that can be combined to create new and more complex financial products.
Mr. Wood says such platforms aren’t intended simply to offer a set of existing services at lower cost. Rather, he says, they can support entirely new services—or deliver existing ones with “orders of magnitude less overhead” than traditional methods.
Mr. Juan says the same applies to data storage delivered via blockchain. He adds that while this may sound like the ultimate commoditized service, storage sold by a handful of giant cloud companies like Amazon Web Services is highly complex—“anything but a commodity.”
Opening up Filecoin’s network to smaller players and developers who can build specialized services leveraging raw capacity could be as disruptive to cloud providers as Airbnb was to the hotel industry, he says.
If new applications remain largely theoretical, the financial gains are very real. Filecoin’s token price has risen 14-fold compared to the average paid during its ICO, while Dot, the token used on the Polkadot network, has increased nearly 20-fold.
The initiators of some of these projects stand to become big winners too. For instance, Filecoin reserved 300 million tokens for itself at launch. That stash is now worth around $7 billion, though Juan says these tokens won’t fully vest to the team over six years.
The recent bitcoin rally has also breathed new life into older, less successful ventures from the ICO bubble. Most accepted payment in bitcoin and ether in exchange for their own tokens, leaving them sitting on potential windfalls. The Tezos Foundation raised $232 million through its 2017 ICO; by July this year, that sum had grown to $652 million. With over 60% of its reserves held in bitcoin, its value is likely now far above $1 billion.
The fact that many less-successful blockchain projects now sit on reserves worth more than their “market cap”—the total value of their circulating coins—means activist investors may intervene, “making life difficult for projects,” says crypto investor and entrepreneur Ryan Zurrer, and forcing them to distribute some of their remaining cash.
This has happened before in tech history. After the dot-com bubble, cash-rich companies without viable business models sometimes lingered for years, while investors agitated to get their money back.
The dot-com era also produced a small number of big winners, including Amazon and Yahoo. Survivors of the ICO bubble still have a long way to go to prove they possess similar staying power.
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