It might sound a little counterintuitive coming from the Executive Director of the Canadian Blockchain Consortium, but the benefits of blockchain have limits, and the current push to tokenize absolutely everything is pushing those limits to the brink. From the NFT bubble to countless companies trying to launch their own tokens and coins, there seems to be an irrational belief that blockchain is the solution to every business and financial problem.
Of course, it makes perfect sense that both companies and individuals are searching for a panacea right now. In 2020, the global economy contracted an astonishing 4.9%, with record volatility in the stock market and the highest unemployment rates in history. The widespread substitution of long-term careers for the insecurities of the gig economy is leaving countless people at the brink of bankruptcy.
This is an uncertain and perilous economic time, and throughout the COVID-19 pandemic, technology has continually appeared to be the answer to the many challenges we’ve been facing, from the shift to telecommuting to the need for industries and service sectors to automated. For people watching the rise of Dogecoin, NBA Top Shot NFTs or the latest meme token, jumping into the blockchain economy can look like a path to financial freedom.
I’ve heard throughout our ecosystem, from legal providers and business consultants to blockchain companies, that there has been a tsunami of enquiries from companies with no previous experience in the digital economy that they want to issue their own tokens. In 2021, we’ve reached a point where both token buyers and sellers have an almost faith-based conviction that this is a market that will keep booming, and that its worth extensive investments of time, legal bills, technical development and risk capital.
Part of the danger is that many of the current entrants into the token economy are fairly new, and without an understanding of history, bubbles have a habit of repeating themselves. To those of us who have been a part of the industry for a relatively ancient 5 years or more, it’s starting to look a lot like the ICO bubble of a few years ago. After an unprecedented rise in token issuances that hit almost $4 billion in 2017, the market suddenly crashed, with 75% of new tokens failing to raise and hundreds of millions of already-invested dollars lost.
“What we do know is that speculative episodes never come gently to an end. The wise, though for most the improbable, course is to assume the worst.”
– John Kenneth Galbraith, Canadian-American Economist
According to Ari Paul, co-founder of BlockTower Capital, one of the leading cryptocurrency investment firms at the time, there were a number of reasons for the market’s sudden contraction. “ICOs were a clear bubble,” he said. “It was partially popped by the expectation of regulatory scrutiny, governance concerns raised by Tezos (a leading platform) and diminishing ‘greater fools’ to pay full price.”
All of that sounds very familiar and relevant right now. There is still regulatory uncertainty about many of our current crop of tokens. There are other challenges – we have a well-established market infrastructure for conventional equity raising, and equally established markets for trading value, whether it’s a piece of real estate or art, and tokenization needs to mature to the point where it can mirror the standards and asset security of those markets.
Right now, there is very little verification in place for the IP behind many tokens, and numerous cases of artists seeing their original works tokenized by scammers who don’t hold the actual ownership rights. While art-backed tokens have been around for years, the wave of current interest was amplified by the US $69.3M sale by Christie’s auction house digital artist Beeple’s work Everydays – The First 5000 Days earlier this year in March.
The Beeple sale demonstrated the possible of an enormous multiplier effect on tokenization for the digital art market, and the possibility of creating a new market of art collectors through appealing to crypto investors. However, reports have suggested that this high-profile sale wasn’t all it appeared to be – some question whether it actually qualified as an NFT, while others point out that the winning buyer, who was building a market for other Beeple NFTs, was motivated to ensure a high sale price.
There are also technical issues, in some cases caused by a massive influx of buyers and sellers, that are threatening the NFT boom. With one of the highest-profile NFT project that acted as a validator of the market, NBA Top Shot, customers have reported huge challenges in getting their money out from the platform, some waiting three months or more for withdrawals. In many cases, the state of the technology hasn’t scaled, and this will cause an investor backlash.
When the NFT boom crashes – and its already showing signs of doing so, especially with the current price decline across the crypto market – then this will reverberate throughout the token economy, throwing thousands of projects into question. I believe that the most likely outcome of the 2021 token bubble is that much like in 2018, scams and poor use cases will tarnish the market, only the strongest and most regulatory compliant projects will survive.
Criticism of the current token boom aside, there are powerful use cases for blockchain finance that do make sound economic sense and don’t rely, like a Ponzi scheme, on a continual influx of “greater fools”. Tokens backed by objectively valuable assets or services that are used to create new liquidity or have something genuinely useful to offer will endure and help shape the way our digital economy evolves.
However, with the high legal and regulatory costs of tokenization, and the large capital investments required in technology and infrastructure, companies need an intelligent strategy that doesn’t rely on an ever-increasing token market cap.
There needs to be a strong sense of realism about the limitations of the tokenization, and an awareness of the history of busts in the market. Blockchain can be a powerful tool for some business problems – but it’s not the answer to every challenge, however much we need optimism in the future of our economy right now.