Bitcoin, blockchain, and cryptocurrencies are some of the hottest buzzwords of the past year or so. The topic has sparked a lively debate, even competition, between fervorous supporters and evangelists on one side and staunch skeptics and naysayers on the other. I know I might be a bit late to the party to express my stance on cryptocurrencies and blockchain, but those who know me were fully aware of it far before I decided to put it into writing.
I first got acquainted with blockchain in 2015 while I was Head of Development at Bitstamp, one of the world’s top Bitcoin exchanges. I delved into cryptocurrencies and blockchain and dabbled with different solutions with the technology several years before the crypto boom of 2017. My coworker and I were on track to invent ICOs (albeit we were missing some key insights) a couple of months before The DAO actually happened, a concept that solved a major problem in our idea (ownership). In fact, I’m still convinced that if the unfortunate bug in line 666 had never happened, there would be no need for ICOs as we know them today.
But if nothing else was contributed by The DAO, it did show us how “smart” the contracts can be and how Ethereum may not be the most trustworthy blockchain out there. No robbery or hack on Bitcoin was ever reversed or warranted a fork, but “smart” contracts were proven to be as unreliable as anything else any human ever does. Don’t forget, it’s still just code that’s obeyed by a machine — a bug is just another instruction and if it’s not visible, it doesn’t mean it’s not there — but I digress.
I love blockchain, I really do. I would not exactly compare it to the revolution the Internet brought, but it is more like what DVD was to VHS — it’s a new and different tech that’s a really good compromise between price and performance for certain solutions — certainly not the silver bullet that most “evangelists” and “enthusiasts” claim blockchain to be.
As a startup, like every other startup out there, we at GewdGame were confronted with the question of how to raise money (despite the right questions being when and why), so we did give the idea of an ICO exactly 5 minutes worth of thought, after which we dropped it like a hot potato. But why, if it was so cool and “in” and lucrative?
It’s a very Bad database for apps
We opted out of using blockchain as a database because we, knowing from experience, didn’t want to use a database as clumsy as blockchain for anything we may need. Ever! Bitcoin, for example, is a poor database, a bad database, unless you are storing bunch of transactions in a sequence (for that, it’s the Best).
Completely on the other side of the spectrum of such databases, we could use Ethereum for smart contracts or rather, as its author alternatively names them, persistent scripts. So since we have contracts on GewdGame, we could go ahead and leverage the persistent scripts to store our reservations on blockchain, but we opted out gladly; it would be very naive of us to expect that storage on Ethereum will be free or inexpensive. So if we were to use Ethereum’s blockchain to do what we do with SQL (for free), every customer (or ourselves) would have to pay for every reservation to be stored on blockchain, while having ZERO guarantee that it’s safer or better compared to anything else, including old and simple SQL. If it’s a small transfer of funds, Ethereum turns out to be too expensive due to its transaction fees, and if the transfer is large, well… Personally, I would trust only lawyers and never a piece of code.
ICOs are a very Bad method of raising funds
Unlike the traditional venture capital investment path (seed → angel → round A-X, …), an Initial Coin Offering brings in a large amount of money all at once, which sounds like a problem solver, but it actually carries its own problems into your company. If you can raise millions on an idea, you either have such a great idea you would not need a crowdfunding campaign (yep, it’s no different than Kickstarter, only far more expensive) or it sounds sexier than it really is and you shouldn’t ask for funds to test it. Just putting the word “blockchain” into your mission statement doesn’t mean you will actually be able to leverage it.
But all is not lost though, as there is a good way to do an ICO — DAO (no, really). DAO stands for Decentralized Autonomous Organization and in a nutshell, it goes like this: I calculate an estimate of my company’s valuation, issue 100 tokens (I chose this number for ease of calculation, but it really could be any number), and sell them for [estimated valuation / 100] per token. Once that’s completed, I then promise the following: I’m the governor/executive of the project for a set amount of time (one year, two years, …) during which I will spend X tokens worth of raised funds and try to make the best company out of the idea. After the set time expires, any owner of the tokens can vote me to stay as executive or replace me (keeping the core of the company untouched). This would in fact leverage the power of blockchain as a medium for tracking ownership and doesn’t necessitate any promise using it in your product, but it does say something implicitly — you aren’t the sole owner of the company after a DAO the way you are after a utility token sale.
So DAOs (could) work just like a regular corporation ownership structure and as such, are resistant to speculation or fraud. This means that they are not as interesting as a funding mechanism, but ultimately, they are fair! But even the DAO approach isn’t immune to price fluctuations of cryptocurrencies with which your company was funded, which means that whatever funds were raised, if not liquidated to “fiat”, may lose value and thus can cause your burn rate to rise to unsustainable levels, at which point one can only wish they hadn’t done a DAO and had opted for an old-fashioned, non-crypto funding round instead.
And we’re left with payments …
… which are just fine 😊 At some point, we plan to include a possibility for customers to spend their crypto on our page — but not yet. We, like the reformed crypto community that believes in “stable-coins” today, are certain that people want to earn their money as something they can spend and not as tulip bulbs. This is why we prioritized the development of payments in fiat money. When we find time, or when demand is high enough, we will add fast and cheap cryptocurrencies (where fast means <1m transaction time with or without crypto-kitties and cheap means fees are low, not that the unit-value is low), of which currently only Litecoin seems like a real contender.
So, blockchain and cryptocurrencies are here to stay, which is really good, and it’s on us to use them and not to abuse them.