China has banned initial coin offerings (ICOs) and one of the world’s largest Bitcoin exchanges – BTCChina – has just announced that they will be ceasing operation on September 30th. The UK’s Financial Conduct Authority has also issued a warning on initial coin offerings and the SEC recently weighed in on the DAO fiasco from July last year. Clearly, there are some dark days ahead.
Regulation and government overreach is what drove networks to decentralization in the first place. It is precisely this type of “attack” that these networks are built to brush off. The weight of the world’s governments combined could never shut down a system like Ethereum or Bitcoin…
Technically that’s true, but this type of crypto-anarchistic rhetoric does not address the reality that government regulation could seriously devalue the price of Ethereum – and we are seeing that effect in full force today.
Regulation is one threat for investors – at least to the short term price of Ethereum – but given the climate it seemed fitting to explore other possible events that may negatively impact Ether before turning back – once again – to the fundamentals of this blockchain.
Without picking up blockchain programming as a full time career, it’s difficult to truly understand the real weaknesses and strengths of the technology which supports this $23bn Ethereum ecosystem. Developers and business owners heatedly debate the “right” way to scale transcations, and critical vulnerabilities appear in even the most well-respected software. If the brightest minds in the industry get it wrong, how do we know who’s right? Blockchain is not the only distributed consensus tech out there; “Directed Acyclic Graph” (DAG) used in coins like IOTA and Byteball have their own advantages and disadvantages. In IOTA’s case, transactions are zero-cost and “The Tangle” (as its DAG is called) can handle thousands of transactions per second. It is quite possible that whilst Ethereum is a new and exciting technology, its usefulness for particular applications (such as transacting value, particularly “machine to machine”) may be usurped in the future.
“ICO” is now somewhat of a dirty word. It’s transpired that raising millions off the back of a whitepaper does not a product make. In fact, quite the opposite. Such an enormous pool of money disincentivizes work – entrepreneurs are entering markets and earning more than they could have ever made with an exit 5 years later. In the not too distant future, we will see projects that announce closure, drop off the grid or simply fail to deliver any type of working product. Whilst the current panic is being led by Chinese regulation (JPMorgan CEO, Jamie Dimon didn’t help), an eventual sell off in the ICO market is inevitable and potentially very damaging to the price of Ether.
Black Swan Events
There are always events that simply cannot be predicted. This goes beyond the unexpected multi-million dollar hacks and into the realm of fundamentally insurmountable bugs and quantum computing. If hash functions can collide then the entire security of Ethereum (oh, and pretty much everything else in digital existence) is undermined. It’s inherently hard to speculate on black swan events, but when you’re dealing with software you can bet that there’s something lurking out there. Our resilience simply depends on how catastrophic it may be.
If Ethereum Should Survive
These are uncertain times, but Ethereum’s price is well grounded on fundamentals. There are objectively beneficial advantages to using Ether over fiat currency in a growing range of applications. Here is some food for thought for investors looking to get excited about the tech at such a bearish time:
- With the reduced miner reward set to decrease in the coming weeks combined with next year’s proof of stake consensus implementation, Ethereum’s inflation (currently 5 ETH per 20 seconds) will practically halt. The total number of Ether in circulation will level out at around 100M, with millions of coins being locked in new contracts that secure the network and earn interest. If Ethereum continues to exponentially increase in transactions per day, that 100M supply quickly becomes extremely scarce.
- The Enterprise Ethereum Alliance continues to develop technologies like Quorum, building out a private and regulated layer of Ethereum which is capable of interacting with the public blockchain. This route will help to onboard regulators, demonstrating the importance of Ethereum particularly for settlement and cross-border payments.
- The Raiden Network will launch their offchain payment channels, enabling Ethereum users to instantly transact Ether and ERC20 tokens with little to no fees. Similar to the lightning network being introduced to Bitcoin, Raiden could help Ethereum to scale transactions by taking smaller payments offchain.
- ID platforms such as Civic and uPort enable users to protect their ID and build credit reputation on the blockchain. These apps will give individuals sovereignty over their data, rather than handing that responsibility to centralized services that get hacked in the most disturbingly hilarious of ways. Topically, these identity platforms are also capable of being used in ICOs, allowing token sellers to quickly ID their buyers – possibly helping to onboard currently hostile regulatory bodies.
- Ethereum’s most anticipated developer conference, Devcon3 takes place in Cancun, Mexico on November 2nd. Announcements regarding Ethereum protocol upgrades as well as new applications and technologies have typically drawn a swathe of new interest in blockchain development. Later in the month, CoinDesk will also be hosting their Invest 2017 event in New York, with businesses and entrepreneurs grabbing the attention of the mainstream media with an often bullish outlook on blockchain tech.
The crypto market has just witnessed the impact of sweeping regulation from one of the most influential countries in the industry. It is no surprise that the resulting panic has wiped billions of dollars from the market cap. As details come to light over the specifics of BTCC’s closure, it may also transpire that the Chinese regulators are just getting started. This drop could get a lot worse before it gets better, but as has been proven time and again, Ethereum lives on.