Why is another bubble likely, and what should blockchain space focus on now. it key points to today's interesting article by Daniel Hayman, PegaSys and ConsenSys Program Director.
After the 2001 internet bubble Carlota Perez has published her influential book Technological Revolutions and Financial Capital. This landmark work describes the concept of how new technologies generate both opportunities and social upheaval. I learned about Perez's work through venture capitalist Fred Wilson, calling him the key intellectual foundation of his investment thesis.
After the ICO bubble in 2018, taking into account the alleged potential of the blockchain, many drew parallels with the bubble in 2001. Recently I re-read Perez's work to think about whether there are any lessons for the blockchain world in it and to understand the parallels and differences between the current case and the current one. As Mark Twain said, or perhaps someone else: "History does not repeat itself, but rhymes."
AT “Technological revolutions and financial capital” Carlota Perez analyzes five “waves of development”,occurred over the past 250 years due to the diffusion of new technologies and related business practices. These waves are still known to everyone, even after hundreds of years: the Industrial Revolution, the railway boom, the era of steel, the era of mass production and, of course, the information age. Each of them gave rise to a flash of development, new ways of doing business and a new class of successful entrepreneurs (from Carnegie to Ford and Jobs). Each spawned general economic principles and a set of business models that Perez calls "Technical and economic paradigms". Each wave also crowded out old industries, led to the bursting of bubbles and caused significant social upheaval.
Technology life cycles
Perez describes the concept of how newtechnology is first consolidated in society and then transformed. She calls the initial phase of this phenomenon “introduction.” During the implementation of the technology, they demonstrate new ways of doing business and making financial profit. Usually this generates aggressive investments in new technology, inflating the bubble, as well as active experiments with the technology. When the bubble bursts, the subsequent recession (or depression) is a turning point for the implementation of social and regulatory changes, allowing you to take advantage of the infrastructure that arose during the aggressive phase. If such changes have taken place, usually comes the “golden age” when a new technology is productively applied. If not, the "gilded age" comes when only the rich win. In any case, the technology sooner or later reaches maturity, and the additional prospects for investing in new technology and generating revenue are becoming less and less. At this stage, there is an opportunity for another new technology to appear on the scene.
Inclusion - rejection
In the concept of Perez new techno-economicparadigms both stimulate innovations and counteract them through the process of inclusion - rejection. This means that when applying new techno-economic paradigms, they provide entrepreneurs with favorable opportunities and new approaches to business that promote growth, but at the same time they reject alternative technologies because entrepreneurs and capital follow the newly established way provided by the techno-economic paradigm shift. When existing technology reaches maturity and investment opportunities run low, capital and talents go in search of new technologies and technical and economic paradigms.
New technology alone is not enough for newtechnical and economic paradigm. The era of mass production gave rise to a combination of oil and an internal combustion engine. The railroad needed a steam engine. For the information age, a microprocessor, the Internet and much more were required. Often technology, as Perez puts it, “ripens” as a slight improvement in the existing technical and economic paradigm, until the technologies supplementing it appear and the process of rejecting the old paradigm is completed. Technologies can stay in this phase of maturation for a long time, until the necessary combination of technologies and opportunities for the start of the implementation period appears.
Fever and blisters
In many ways, bubbles generated byfevers (aggression) during the formation, allow new technology to succeed. Bubble triggers a flash of (over) investment in new technology infrastructure (railways, channels, fiber optic cables, etc.). This infrastructure makes successfuluse of technology after a bubble explosion. Bubbles also foster a wave of experimentation with new business models and new technology approaches, allowing future entrepreneurs to follow proven paths and avoid common pitfalls. Although the bubble causes big financial losses and economic troubles, it can be critical for the adoption of new technologies.
Juxtaposition of facts
With a quick look at the concept of Perez, you canto assume that in 2018 the blockchain went through a phase of aggression and a bubble, which means we should be on the verge of a “tipping point” for the blockchain. It will be a mistake.
From my analysis of the concept of Perez, it follows thatthe blockchain is actually still undergoing a period of maturation - the early days of the technology life cycle preceding the implementation period. In 2018, there was no aggression and bubble for Perez, because there were no key results necessary to achieve a turning point: significant improvements in infrastructure and reproducible business models that could serve as a roadmap during the deployment period. The bubble arose early, as blockchain technology made liquidity possible at an early stage of its life cycle.
From the fact that the period is still ongoingAging follows three main conclusions. First, before the technology reaches maturity, another phase of aggression and a blockchain bubble are likely. Perhaps even a few more bubbles are waiting for us. Secondly, the best way to success is to work not against, but through the existing technological paradigm. Thirdly, for the emergence of a new paradigm based on the blockchain, the ecosystem must actively invest in infrastructure.
ICO bubble does not meet the criteria
In 2018 there were not many signs of a “period of aggression" by Perez, ending with a turning point. The best (and ultimately the worst) way to make money was speculation. The “fundamental indicators" of projects rarely mattered to their value or growth. Wealth was sung, and individual prophets received recognition. Expectations went beyond all bounds. Scam and fraud were widespread. Retail investors have been heavily invested out of fear of lost profits. There were all the signs of a classic bubble.
Although there are no “good bubbles," bubbles canhave beneficial side effects. During the mania of canals and railways, the corresponding facilities were built, which had little hope of being profitable. But after the bubble, these channels and railways remained. This infrastructure has made future endeavors cheaper and easier. After the Internet bubble burst in 2001, fiber optic cables were sold for a penny. Investors suffered terrible losses, but the fiber-optic infrastructure created advantages for consumers and made possible the emergence of a new generation of companies. Such excessive investments in infrastructure are often necessary for the successful deployment of new technologies.
However, the ICO bubble did not have favorable side effects of the Perez bubble. He did not provide enough infrastructure for the further development of the blockchain ecosystem.
Compared to previous bubbles, investmentThe cryptospheres in the infrastructure were minimal, and this infrastructure could very soon become obsolete. Such physical infrastructure, as, for example, mining equipment, is unlikely to be useful. The additional computing power in the blockchain gives an ever lower marginal revenue and has characteristics that are different from the traditional infrastructure. Unlike a city receiving new fiber optic cables or a new channel, an increase in the number of miners does not mean that more people are gaining access to the blockchain. In addition, mining with proof of work is unlikely to be through the further development of the blockchain.
Non-physical infrastructure was also minimal. Tools that can best be described as “Basic blockchain infrastructure”, did not have easy access to the ICO market. Developer tools, wallets, software clients, user-friendly smart contract languages and cloud services (among other things) are the infrastructure that can lead blockchain technology to maturity and full deployment. The cheap capital provided through the ICO was mainly applied to the application tier. (despite the fact that the whole house was built on an immature foundation). It motivated people to focus not onwhat was most needed, but on what was easiest to finance. Such perverse motivation could even harm the development of key infrastructure and split the ecosystem.
I do not want to despair because of the state of the ecosystem. The ICO bubble still did something good. Many talents have come to the region. Startups experimented with different application options to see which of these would take root. New blockchains were launched using a wide range of new technologies and approaches. New technologies have entered the market. Many basic infrastructure projects have raised capital and made significant technological progress. Enterprises have developed their own blockchain strategies. Very successful companies were born that will continue to finance innovation in the sector. The ecosystem continues to evolve at breakneck speed. However, in general, the bubble did not leave behind the infrastructure that would be expected from the bubble by Perez.
Liquidity appeared early
2018 ICO bubble happened at an early stage in the life cycle of blockchain technology, during its maturation period, that is, much earlier than what the Perez concept predicts. The reason is that technology as such has allowed liquidity to appear at an early stage of the cycle. Financial assets became liquid before the underlying technology matured.
In the case of the internet bubble, companies didn’t needone year to enter the market, and therefore, there was a certain threshold of quality and certain reporting was required. This process allowed the technology to evolve and improve before liquidity appeared. Since the blockchain made liquid tokens possible, the issue of which was practically free, a race arose to create valuable tokens instead of valuable companies or technologies. It was possible to create a liquid asset without any work on the underlying technology. The financial level immediately came to a liquid state, ahead of the development of technology. Resulting tokens existed in very narrow markets, largely driven by momentum.
Due to early liquidity, the dynamics of the bubble in this space could begin to unfold early in relation to technology. In the end, it was not the first blockchain bubble. (Bitcoin already has a rich history of bubbles and crashes). The narrow markets in which these assets existed are likely to accelerate bubble dynamics.
What is blockchain space worth focusing on now
Perez describes two components after a breakthe bubble needed to successfully deploy new and long-lasting technologies: proven, reproducible business models and easy-to-use infrastructure. The blockchain has not yet achieved these goals, so the conclusion is clear that the blockchain has not yet come to "Tipping point".
Although protocol development is fastAt the pace, the blockchain is not yet ready for mass deployment into a new techno-economic paradigm. We do not have proven, reproducible business models that can spread from one industry to another. Exchanges and mining companies - the main success stories of the blockchain - are not reproducible business models and are not applicable to different industries. We do not yet have the infrastructure for mass adoption. Moreover, the successful application variants mainly support the existing economic system. Komgo uses the blockchain to improve the incredibly old-fashioned industry (trade finance) while acting within the framework of the old economic paradigm.
So blockchain is still experiencing"Ripening period." Before most technologies could enter the implementation phase and transform the economy, they were used to improve the existing economy. In the case of the blockchain, it resembles private and consortial decisions.
Some consider this a bad result. I think this is crucial. Without such experiments, the blockchain runs the risk of running out as a technological movement before it has the opportunity to develop and mature. For example, I am convinced that ConsenSys does not receive well-deserved recognition due to the involvement of enterprises in the space of the Ethereum blockchain. Such entrepreneurial interest attracts more talent, creates the prerequisites for additional infrastructure and gives the space more confidence. Now the entrepreneurial use of the blockchain is more enthusiastic than any other short-term development of events.
The future aggressive phase of the blockchain
This was not the first blockchain bubble. And I expect not the last (although it is hoped that some lessons will be learned from the past 12 months). According to the concept of Perez, when on the blockchaina reproducible business model will be found, a new period of aggressive investment will begin, which is likely to lead to a bubble. As Fred Wilson writes: “Carlota Perez shows that nothing important happens without a landslide.” Given the amount of capital available, II believe that such an outcome is quite likely. Given the great potential of blockchain technology, more risk capital is likely to be involved in the bubble than in 2018.
The next aggressive phase will be differentsame signs as the previous one. Fundamental indicators will lose relevance; retail investors will enter the market for fear of lost profits; increased fraud; etc.
Lessons for Blockchain Businesses
The Perez concept offers two directstrategic lessons for PegaSys and any serious projects for developing protocols in the blockchain space. First, you should continue to work with traditional enterprises. Working with enterprises will allow technology to evolve and will facilitate experimentation with business models. This is a key part of the technology life cycle and the best way to help the ecosystem grow.
Secondly, for the ecosystem to succeed, it shouldcontinue to invest in infrastructure and various technologies. At first, this may seem obvious, but the point is that if we focus only on those opportunities that are commercially viable today, we will miss the chance of a new techno-economic paradigm. Our work on Ethereum 1.x and 2.0 stems directly from our goal of helping the ecosystem grow and mature. The work of other groups with Ethereum and other blockchains also leads to this goal. We are deeply committed to the Ethereum roadmap and at the same time recognize the value that innovation brings to the space beyond Ethereum. The Ethereum roadmap takes into account the lessons of other blockchains, just like these blockchains were inspired by Ethereum. So the technology develops and improves.