4 Reasons Why Tezos Could be the Netscape of the Blockchain Bubble

Jeremy Epstein Business 6 Comments

I’ve often made parallels between blockchain (Internet of Value) and Web (Internet of Information) in terms of the disruptive potential and societal benefits.

They hold (though I do think blockchain will be bigger).

Another parallel that is starting to emerge is one that, as a student of history, I’m aware that we’ve seen many times over.

The “speculative bubble.”

Whether it’s the South Seas, Dutch Tulips, or simply Internet 1.0, investors who want a piece of the action jump on board. and drive prices to insane heights.

What’s been going on in the blockchain market over the past few weeks seems to be reaching that point.

Accelerating this trend is the new form of crowd-funding known as ICO-Initial Coin Offering, where pretty much anybody can raise money.

It’s definitely a legal gray area, but whatever the facts are around the so-called Howey Test (to determine if something is a security), the fact is that it’s happening and pretty much anybody can join in.

In Internet 1.0, for example, most of the early stages were driven by venture capitalists.

Today, it’s the venture capitalists who are following the crowds.

(This fact actually makes me wonder if we’re going to see a disintermediation of the venture capital business.  To their credit, I think Blockchain Capital’s “digital liquid fund” shows one potential new model.)

In my mind, this wave began in earnest last May with the original DAO raising $150 million via crowdfunding of Ether.  While the story ended poorly, it highlighted an entirely new way of raising money.

That’s the really important part of the DAO.

Now, it seems like we have a new ICO every week (or multiple per week). Some of these have ideas which definitely have long-term potential. Some of them, I don’t quite see. Some of them make no sense at all.

Even for those that do make sense, the valuations are starting to get crazy.

Case in point: Gnosis.

A decentralized prediction market (we’re going to have a few, to be sure) that offered only 5% of its tokens, has a whitepaper and basically no working product, raised $12.5 million in 15 minutes, giving it a valuation of nearly $300 million.

Since then, speculation took it to over $1 billion.

I am sorry…there’s no scenario where – to me- that makes any sense.

The effect is rippling (pun intended-you’ll see why) to many others as well. Ripple, which is an enterprise-focused blockchain for international settlements- has a token, XRP, which has exploded in recent weeks.

Don’t get me wrong…I believe Ripple actually has a great idea, serving real customers, and provide a working product. I also think they have good potential (disclosure: I own some). Still, the recent run-up seems excessive.

But, if I had to guess, I would say that the recently-postponed, but upcoming ICO for Tezos, is going to be the equivalent of Netscape’s IPO.

It will be the moment where pretty much everyone else turns to this industry and says “oh wow, what the hell is going on over there?”

Why do I think that?

A few reasons:

  1. There’s no set amount to be raised.
    They will keep it open for two weeks, so people can keep putting money into. And, as word gets out that more money will go in, FOMO will kick in.
  2. Big names are behind it.
    Olaf Carlson-Wee, the founder of Polychain Capital and original Coinbase employee wunderkind has said he likes it, but bigger than that is Tim Draper saying he would invest directly in it. There was one other “mainstream VC” who endorsed it as well, but I’m forgetting whom at the moment.
  3. At it’s core, Tezos is a good idea, not a point solution.
    I’ve talked to Tezos and read their whitepaper (4 times, mostly because it’s SO deep), so something LIKE Tezos (a community-driven blockchain that can update itself) makes a ton of sense. On its own, it’s not a bad investment.
  4. Greed.
    The returns on many of the higher profile ICOs have been ludicrous. 400% on Gnosis in 3 weeks? That may be an outlier, but combine that with the run up in Bitcoin and Ethereum and you have a potent cocktail.

Honestly, I wouldn’t be surprised if Tezos raised $300-500 million or more.

Think people will notice that?

I actually feel a little bad for Tezos because I worry that the amount of money, attention, and expectations put on a relatively young company is going to make it difficult for them to execute and deliver. Maybe I’m wrong.

I just sense that, in the midst of all of these hyped ICOs, we’re seeing a true bubble emerge which, invariably, will create a crash.

That’s fine and I hope everyone can protect themselves (but some won’t be able to).

While this is all going on, however, the true wave of blockchain-driven innovation is being laid. Tezos is one of them but, to my earlier point, too much attention at too young an age may be a deathwish.

Instead of surface level things like decentralized casinos and prediction engines, the people building decentralized application platforms are going to emerge from the rubble.

They are building the infrastructure of the decentralized economy. But it’s not as sexy (or even understood yet) and the hype noise is drowning a lot out.

Frankly, I’ve been very surprised by how quickly this market has gone from the proverbial 0-60, but it has. Soo, since we are living in the ‘Age of Accelerations’ as Tom Friedman writes, it makes me think that the boom-bust-rebirth cycle for blockchains will happen relatively quickly.

The key thing, in my mind, is this.

One of the first ‘game-changing’ elements to the blockchain revolution is the fact that now, raising investment funds is becoming democratized.

It’s kickstarter + a share of ownership. That’s cool and it gives anyone the chance to get VC-like returns.

Of course, it introduces a caveat emptor scenario of epic proportions because of how early and extreme some of these offerings are.

Still, it’s exciting and definitely liberating.

Next week, I’m going to the Token Summit in NYC to do a deep dive on this.

For now…understand the new ICO funding models, but don’t get caught up in hysteria.

 

 

  • Chuck

    It’s pretty much equity crowdfunding and sooner or later (likely sooner) governments will step in because we are technically dealing with securities trying to disguise themselves as “decentralized tokens”. Just because an application is open source doesn’t mean it’s technically “decentralized”, nor does a group of people controlling the release of tokens sound “decentralized” to me. Very murky right now. But much of this is equity crowdfunding with a very fine line between creating a decentralized micro economy and plain ol’ extortion! It’s super easy to fall into Ponzi territory, not saying all are, but it’s even easy for well meaning and value creating venture to fall into that territory when pre-mining is involved and a “foundation” is setting the rules of “pre sale” and token release.

    • Certainly interesting to see the innovation unfold in real-tie

      • Chuck

        I’m fascinated by the technology, it’s been a while since I’ve really been this genuinely excited about a technology! Cryptocurrency itself is awesome, but just seeing the problems blockchain tech can solve, like in the music industry for example where the entire system of finding and collecting royalties is a convoluted mess and is nearly impossible for an indie artist to collect foreign royalties without giving up a portion of their publishing to an established admin company that has the funds and networking…this is a major game changer and can put a lot more power into the hands of individuals as opposed to large corporations! I am all for equity crowdfunding, and these models are definitely challenging the status quo which will help us progress towards some game changing ways of doing business. But on that same token (pun intended!) very skeptical of the ICO’s in their current influx and form. While I applaud the “ask for forgiveness rather than permission” mentality, there are many areas where the term “decentralization” is being a bit manipulated… I picture Inigo Montoya saying “I do not think it means what you think it means”.

        • Nice…way to drop the Princess Bride reference

  • Chuck

    I’ve had some conversation with people today and it was brought up that since these applications and protocols are mainly all open source, what is preventing anybody (a new company, community) from re-writing a protocol to not need whatever token it’s tied to, and operate with a completely different business model? Wouldn’t that crumble the micro economy that the original token philosophy was trying to create?

    • Nothing…but the value of the protocol comes from increasing utility which drives the value of the token up for the holders.

      It’s a new world