Where do we start? Possible answers to that question might include: the recent mini-furore over whether R3’s Corda distributed-ledger platform is or isn’t a blockchain; the incidental demonstration of Bitcoin’s utility provided by the ransomware crisis; the apparently renewed trend (this has happened before) towards crowdsourcing as a mechanism to finance development in the crypto-space. We’ll get back to one of those later (Corda does what it does, so it doesn’t matter what it is; ransomware – enough already), but perhaps a more appropriate starting point would be the Elliot wave principle.
In the first of our two Q&A interviews this month (see The profitable psychology of altcoins), Maksim Balashevich, founder of the cryptocurrency data-feed service Santiment, suggests, first, that ongoing blockchain development will drive further cryptocurrency differentiation, thus a wider variety of coins developed for a wider (and increasing) variety of use cases, and secondly, that human nature is now working in our favour. The US author Malcolm Gladwell might call this a tipping point; Balashevich cites Ralph Nelson Elliott thus: “The altcoin market is entering the ‘third of a third’ wave in the Elliott Waves theory. This represents a moment the crowd realizes that the main trend, either up or down, is occurring.”
And we’re missing out if we don’t get in now. Yes, we’ve all been there. We all know that “the crowd” is not necessarily a reliable judge of a worthwhile investment opportunity. There has never been a better time, yada, yada. If we were talking about “the crowd” buying into a market or an asset class – exactly: this would be no time for irrational exuberance (and see the Q&A for Balashevich’s pithy comment on what might still happen next). There will be no suggestion here that this time it’s different.
But straightforward empirical observation does at least tell us that: there’s a lot going on in the cryptocurrency/blockchain innovation (and, more gradually, implementation) space; much of it is both creative and genuinely innovative; there’s engagement at every level, from the retail customer watching the Bitcoin price on her smartphone to the largest global institution.
Oh, and yes – we can. To borrow a phrase from both the 2008 Obama presidential campaign and the television character Bob the Builder, Yes We Can! The box Plastic Fantastic tells the story of Monolith Studios’ initiative to link the Visa payments network to Ethereum. Short version: you can go shopping with a plastic (debit) card and spend the cryptocurrency Ether (or an Ether-standard equivalent) as easily as you can spend anything else (and it’s a neat touch that there is an Ether standard now).
The less immediately obvious innovation here is the part that stays the same: you’re carrying the same old plastic. The transition from fiat to crypto just kind of happens in the background. Yes We Can handle cryptocurrencies without even thinking about it. That’s significant: there’s no barrier to entry. An underlying theme of this article will be that today’s innovation is creating acceptance of, and thus demand for, cryptocurrency/blockchain solutions as much as it’s working towards those solutions.
Okay, that’s the ballgame. The Visa payments network is now connected to Ethereum. This means that “token holders will be able to use Ether as well as other ERC20 tokens to purchase items anywhere that accepts VISA debit cards”. If you’re a “token holder”, you understand, you have a Token Contract Wallet to hold your tokens, and a reassuringly plastic TokenCard debit card to carry around in your, er, leather wallet. There is, of course, an app for those of us not retro enough to carry leather wallets.
Monolith Studio gets the credit for TokenCard, no pun intended, and co-founder Mel Gelderman tells us: “We are very happy with the success of the TokenCard launch and excited to bring the power of the Ethereum economy to the general public.” Earlier, Gelderman described the TokenCard/Ethereum/Visa link-up as “the birth of the biggest shake up in financial history”.
For those just joining us, ERC20 is the Ethereum standard for tokens, and if we’re going that far back, a token is a representation of value. It’s tradable, or in this context, spendable. For more on the technicalities, and for example the underlting smart contract, there’s a useful white paper at https://tokencard.io.
What we have today is a broad array of more or less disparate elements that seem, suddenly, to be coalescing into a discernible future. We’ve had early Bitcoin; we’ve had early blockchain (as in: don’t mention Bitcoin); we’ve had institutional buy-in to distributed-ledger development without and then with “moving parts” (typically Ether). We’ve largely stopped talking abour remittances, and in the background, we’ve had the gradual development not only of an FX-style trading infrastructure for cryptocurrencies coupled with a largely open-source/collaborative approach to development, but also a gradual acceptance of their role in retail/institutional financial culture. There’s never been a “killer app” for any of this, but we’ve reached the point where – so to speak – it’s already mainstream but under-the-surface mainstream.
It’s as if, all of a sudden, crypto has been here all along. We may not be running our operations on blockchain yet, but we’re used to seeing it around. What happens next, therefore, is as much a function of what’s happening now, as it is of whatever profit-free but somehow investable app next takes over our children’s phones. The clues are all here – so let’s take a closer look at some of them.
The future in the present
We live in interesting times, so we start with gold.
Islamic fintech company OneGram, working with the Dubai-based bullion-trading company GoldGuard, has launched “the world’s first completely gold-backed digital currency, with each token representing one gram of gold held at a vault inside of the Dubai International Airport”. You can buy your OneGramCoin (OGC) tokens from now (the crowdsale started on 21st May) until 22nd September; there are 12,400,786 on offer (Bitcoin is a payment option). At the end-May gold price, the crowdsale would raise in excess of USD500 million.
Buy into this, and you’re holding a completely gold-backed digital currency. Note: in the current jargon, this is an “initial coin offering”, an ICO, and the caveat is: anybody can offer an ICO in anything in this space, so take care. The OGC is featured here for a better reason than just because it’s an ICO. For our purposes, the point is the structure: the commercial proposition centres around a Shariah-compliant asset with an upside. To quote at length from the paperwork: “OneGram’s transaction fees will be reinvested to buy more gold, increasing the amount of gold that backs each token. As transaction volume increases, more gold will be added to the vault and all OneGram investors will share the profit. As such, OneGram will offer increasing value to investors, and open doors for Muslims to participate in the digital currency economy.”
There are “more than 2 billion Muslims worldwide”, says the next paragraph. Ibrahim Mohammed, CEO, OneGram, tells us: “In recent years, the Middle East has seen incredible growth in fintech innovations including digital tokens and smart contracts. OneGram’s token, OGC, is the first Sharia-compliant digital currency, opening doors for the Islamic financial world to participate in the blockchain economy.” [An initiative by the UK Royal Mint to facilitate investment in gold via a distributed-ledger structure was discussed in e-Forex Q1 2017.]
A Shariah-compliant point of access to the blockchain economy for “more than 2 billion Muslims” is compelling in itself, but notice also the combination of invention and re-invention here: there is a full-value gold reserve behind each unit in this new currency. That’s the point. We’re not talking about blockchain innovation any more; nor are we in some kind of silo where we talk about innovation before returning to the same old day job. The US dollar was invented around a currency reserve. Centuries ago, this article would have pointed out that using wood pulp to make banknotes wasn’t the innovation; backing them with gold was. Maybe treeForex (sorry) was ahead of its time, but think of it this way: for our globally networked digital world, somebody has finally (re)invented a currency unit that is both compatible with the wider economy and asset-backed.
Trading it easy
So at last we have what we’ve always had: a currency that works with the technology of its time. We move on to Shapeshift. This is “the world’s leading instant exchange for Bitcoin digital currency and other blockchain assets”, and it has just completed “the largest ever Series A funding round for a non-fiat financial exchange”. While we’re in quoting mode, it is also “the fastest and safest way for both humans and machines (such as trading bots and IoT devices) to exchange any asset that exists on a public blockchain”.
For our purposes, the key detail is that Shapeshift explicitly offers exchange between different, er, denominations of blockchain tokens – the Shapeshift website uses that term: blockchain token. If you’re running a blockchain fuelled by Ether, you can now convert your tokens into Bitcoin-blockchain tokens. It may be that the terminology is getting a bit wobbly here, and we’re all going to end up trading tokens rather than currencies (more on this below), but there’s more here than just a handy opportunity to switch out of Bitcoin. Or Ether. Greenwich Associates has recently (March 2017) published its study Addressing the Latest Trends in Digital Ledger Technologies, which finds, first, that above 50% of finance houses plus 61% of tech companies see open-source technology as their best foundation, and secondly, significantly, that 81% of all study participants favour permissioned blockchains over the public variety.
Think of all those distinct and separate permissioned blockchains, secure within their walls, and all those circulating tokens going round and round within those walls, carrying value. Firewalls, whatever kinds of walls; it’s very hard not to come up with the analogy of mediaeval castles. In this new world, we might assume that currency token issuance is by national treasury permissioned blockchain, and that the biggest issue arising will be interoperability between the tokens of those permissioned blockchains. But we might also assume, citing Shapeshift, that the “interoperability challenge” won’t go to the IT department; it’ll be handed to the trading desk.
So. In our – admittedly selective – round-up of clues to the future, we have the example of a fully gold-backed, IT-compatible currency unit with an upside (I think “IT-compatible” covers it?), and the example of a well and truly A-financed crypto-exchange that seems to want to describe itself in terms of an infrastructure-level trading opportunity.
Erik Voorhees, Founder and CEO of ShapeShift, tells us: “The future world of natively digital assets is quickly arriving; it is one in which millions of forms of digital value, from access keys to tokenized derivative contracts to video game items, will trade between people and machines all over the world, every second of every day. Just as information has gone natively digital, so too now goes value. Bitcoin taught a skeptical world how to do it, and the gold rush is on.”
Tell your algorithm to start collecting tokens.
The wisdom of crowds?
We mentioned crowdsourcing. Yes, the DAO was crowdsourced (Decentralised Autonomous Organisation; May 2016), and has been covered here already (eForex, Q3 2016). Yes, the word “token” does seem to have displaced the term “currency” in many of today’s projects, and yes, maybe that does suggest a gradual blurring of conventional distinctions between token-portable stores of value – today’s coffee-break research finding (thanks, Wikipedia) was that three of the top five highest funded crowdfunding projects are running on the Ethereum platform, and that the number one slot is held by a “space combat video game” (on Kickstarter).
For some time, the over-arching vision in this space has combined effectively intelligent assets (smart contracts, et cetera) with what we might call absolute compatibility: everything is networked; everything flows. From that perspective, the significance of crowdsourcing is not that it cuts out venture capital (and its associated due diligence), nor indeed that the crowd, in aggregate, has more money (and asks fewer questions) than any venture capitalist. For our purposes, as we watch the progressive normalisation of the blockchain economy and its “fuel”, the significance of crowdsourcing is much simpler: the crowds are being given an opportunity to buy into the future.