The ICO Is Dead. Long live Blockchain! Part 1

A year ago, we reported that the ICO (Initial Coin Offering) bubble had burst – just as we had predicted already in 2018. This was pretty easy to foresee, even though we did get a bit of hate mail from ICO fanatics along the way.

The ICO bubble grew to a significant size before it burst:

  • A total of 5727 ICOs raised about 30 billion USD globally
  • Only three successful ICOs since June 2020
  • No new ICO projects visible in the pipeline right now

But don’t get me wrong – the blockchain technology behind the ICO phenomenon is very important: a major tool supporting the rapidly ongoing digitalization of almost everything.

  • In this blog post, we have a look at Cryptocurrencies – the best-known use case of blockchains
  • In the next one, we will focus on some other important blockchain technologies and use cases like Smart Contracts, Non-Fungible Tokens, and Decentralized Finance

Blockchains and Cryptocurrencies

Bitcoin (like most other cryptocurrencies) is based on a decentralized, public ledger technology called the blockchain.

  • Bitcoin blockchain tracks bitcoins. Some advanced blockchains can track and execute also more complex items like event triggers and software applications.
  • There is no trusted intermediary or a third party (like a central bank) controlling the blockchain. Instead, anyone can hold a copy of the blockchain, and read it and write to it.
  • When adding new blocks of transaction data to the blockchains, the blockchain networks use clever voting and validation methods to establish consensus and to keep the copies in sync.
  • This transaction validation process is often called mining: miners obtain new cryptocurrency as a reward, an incentive to contribute processing power to the validation process.

As a result, each copy of the blockchain has a full ledger of the transactions – history can’t be changed, erased, or forged.

  • Blockchain technology offers a way for untrusted parties to reach and share consensus on a common digital history
  • A common digital history is important because digital assets and transactions are otherwise easily faked or duplicated

Early blockchain implementations have faced scaling issues: Bitcoin can process about 5 transactions per second, Ethereum about 25 transactions per second. For comparison: Visa can process about 25,000 transactions per second.

Do we need cryptocurrencies?

There are almost 9000 different cryptocurrencies; many born amidst the ICO fever and totally useless, but some of the strongest cryptos flourish:

  • The combined value of Bitcoins is roughly a trillion dollars (and, with the volatility of the markets, it could be half a trillion or two trillion when you read this)
  • All other cryptocurrencies together are valued at roughly half a trillion dollars
  • The average 24-hour transaction volume of crypto called Tether is nearly 100 billion dollars
  • This is a moving target,  for up-to-date information, see

Cryptocurrencies vs Fiat money

The term fiat derives from the Latin word fiat, meaning “let it be done”. Fiat money was first used during the 11th century in China, and the US dollar was decoupled from gold as late as 1971. Fiat money has dominated the global market since the 20th century.

Government-issued fiat money has some very useful features like:

  1. store of value and
  2. medium of exchange

So, how do cryptocurrencies correspond with fiat money?

Cryptocurrencies as a store of value

A store of value is anything that retains purchasing power into the future. The most common store of value in modern times has been money, gold being the number two on the list. Money is optimal because of its liquidity: it can easily be exchanged for other goods and services. But when an issuer of fiat money (typically a nation-state) faces a crisis, fast inflation can affect its currency. Gold, Swiss Franc, and the US dollar have been traditional safe havens during times of crisis – gold has been around for eons and the US dollar also has withstood many a crisis.

The Covid-19 evidence indicates that when a serious financial and economic disruption hits, Bitcoin does not act as a safe haven – rather as an amplifier.

  • When Covid-19 hit the financial markets, the value of the Bitcoin dropped over 40% almost immediately.
  • The extremely loose monetary policy (quantitative easing in fancy terms) following the initial crisis has led Bitcoin to rise to new record heights while the stock markets have recovered in a bit more restrained manner.

Bitcoin and other cryptos are teenagers at best and, therefore, there is no experience from long-term storage of value.

Bitcoin price in 2020

When a serious disruption hits (like the Covid-19 epidemic in this picture) , Bitcoin does not act as a safe haven – rather as an amplifier

Another similar drawback is the continual and significant short-term price volatility of most cryptos.  So-called stablecoins are designed to solve this problem: they are virtual currencies typically backed by an asset such as fiat money, gold, or even other cryptos to provide more stable value for the virtual currency – more about stablecoins in the next blog post.

Cryptocurrencies as a medium of exchange

There are several types of monetary transactions:

  • large amounts with tightly controlled account transfers
  • smallish payment at a store’s cashier
  • a micropayment when browsing online content
  • cross-border transfers using different currencies
  • etc.

Bitcoin is relatively poorly suitable for any kind of smaller or faster payment, it is just too slow and expensive: about $20 for each transaction with close to 10 minutes average confirmation time. However, there are some promising workarounds under development.

The are several new third-generation crypto technologies that can successfully challenge fiat money-based payments in almost all transaction categories. But which model and technology will prevail in commercial transactions is a different story.

Some other Crypto-Fiat  differences

Cryptos have a few important and interesting differences compared to Fiat currencies and the traditional banking system.

Decentralized – The global, decentralized architecture means that no single entity — like the US government or Visa — can shut it down, freeze funds, or reverse transactions. There is also no centralized single point of failure. Early enthusiasts and supporters included people opposed to government control and taxation right.

Anonymity – Even though the balances of crypto accounts and transfers between accounts are publicly visible, the ownership information of an account is no stored. However, even Bitcoin is no longer quite as anonymous as it was in the early days:

  1. Most crypto exchanges today use Know Your Customer (KYC) standards
  2. There are advanced crypto-networks monitoring tools  that help to trace the flow of funds

Some crypto projects offer stronger user anonymity like Monero and ZCash.

Durability – This is a double-edged sword. Not a single Bitcoin has ever been lost on the blockchain. What has been lost, however, are private keys to get access to Bitcoins. User error is a primary threat to Bitcoin’s physical durability.

Some key cryptocurrencies

1. Bitcoin (BTC), total market value $1027 BUSD (values at 16.3.2021)

The first decentralized cryptocurrency, Bitcoin, was released first as a white paper in October 2008 and as an open-source project in January 2009.

A few interesting nuggets of information about Bitcoin:

  • The identity of Satoshi Nakamoto – the so-called “crypto genius” behind Bitcoin – remains unknown
  • Bitcoin is fully open-source: its source code is easily copiable and usable to create a derivate/competing blockchain
  • The number of Bitcoins is limited to 21 million.
  • Today, there are 18 657 375 Bitcoins in existence and about 900 new Bitcoins are mined every day.

Bitcoin has a dual legacy:

  1. A trillion-dollar total value with over 60% share of the total crypto market creates a critical mass that totally eclipses other cryptos
  2. But compared to more recent cryptocurrencies and blockchain technologies, it is very cumbersome:

There are potential add-on fixes under development – but the bitcoin core (base layer technology) appears to stay relatively unchanged. This is a considered choice by the Bitcoin community: this choice aims to limit potential disruptions caused by a failed update and the resulting grave consequences. As a result of this, the Bitcoin core has proven to be very robust.

Lightning is a technology built on top of bitcoin that enables “lightning-fast” Bitcoin payments without worrying about Bitcoin’s slow transaction speed. Let’s have an analogy from traditional bank solutions: the interbank backbone network is secure but clumsy like Bitcoin, but fast and user-friendly services such as credit cards have been built on top of this core network.

Being stuck with first-generation crypto technology might be a long-term threat for Bitcoin.

  1. As a blockchain technology, Bitcoin is simply not very competitive
  2. New glued-on features can hardly fully compensate for the fundamental deficiencies of the base layer
  3. Fixing the lacking energy efficiency with bolt-on solutions is not likely to be successful and the current wasteful electricity usage increasingly dampens the interest of climate-conscious users to participate in the Bitcoin fever.

But for now – with plentiful loose money around – the critical mass of speculative investors is producing record high Bitcoin values.

2. Ethereum (ETH), $205B

The second-most valuable crypto, backed by the largest number of developers and with the most applications. Computer scientist, lawyer, and cryptographer Nick Szabo published a white paper establishing Ethereum in 2013 and the project was started as an ICO in 2014.  This is an example of a successful ICO project with thorough background work. (A typical ICO project documentation could charitably be described as “a quick doodle on a napkin after a long lunch”.)

Ethereum is often called a second-generation cryptocurrency. The most significant technical difference to Bitcoin is its versatile programmability. Ethereum is truly the workhorse of blockchain technologies: for instance, 87% of the 5727 ICOs were implemented on Ethereum (there is nothing wrong with the blockchain technology of Ethereum; the problem with the failed ICOs was in their substance – or, to be more precise, the lack thereof). The applications described in the next installment of this blog are based on Ethereum.

There are already third-generation blockchain solutions on the market that are in some respects clearly more advanced and efficient than Ethereum. With the ongoing technology upgrade, Ethereum is expected to catch up with the competition. And unlike in Bitcoin, the changes and fixes are made directly into the core blockchain technology, i.e. Base Layer level. The upgrade, called Ethereum 2.0 is, however, a very challenging project and it remains to be seen whether it can be completed without major setbacks and on schedule during 2020–2023.

3. Tether (USDT), $39B

Tether is the most transacted cryptocurrency with an average daily transaction volume of nearly 100 billion US dollars (nearly 60% higher than Bitcoin which comes in second).

Tether is called a stablecoin because it was originally designed to always be worth $1.00, maintaining $1.00 in reserves for each tether issued. Nevertheless, Tether Limited states that owners of tethers have no contractual right, other legal claims, or guarantee that tethers will be redeemed or exchanged for dollars. On 30 April 2019 Tether Limited’s lawyer claimed that each tether was backed by only $0.74 in cash and cash equivalents.

The most significant difference to Bitcoin is the promise of a 1:1 exchange rate to the US dollar. This coupling of currencies seems to work at least in minor economic crises: Tether value stayed quite steady when the Covid-19 hit the market.

4. Ripple (XPR), $22B

Ripple is created by Ripple Labs Inc., a US-based technology company.

It is a real-time gross settlement system, currency exchange, and remittance network offering: “secure, instantly and nearly free global financial transactions of any size”. By 2018, over 100 banks had signed up, but most of them were only using Ripple’s XCurrent messaging technology while avoiding the XRP cryptocurrency due to its volatility problems. A Ripple executive acknowledged in 2018 that “We started out with your classic blockchain, which we love. But the feedback from the banks is you can’t put the whole world on a blockchain.”

My take on cryptocurrencies:

  1. Cryptocurrencies are here to stay – they have several very practical and fully legal uses
  2. There will be a handful of winners – different solutions for different applications
  3. Bitcoin and other cryptos are teenagers at best – there is no experience from long-term storage of value

But it is going to be a very bumpy road.

And some governments are planning to protect their fiat currency and control of currencies in use:

I sold my Bitcoins during the previous peak in December 2017 and got a 60X return on my investment. If I had held on and sold them only now, I would have gotten a 200x return.

Part 2  of this blog post will focus on crypto and blockchain-based platforms, technologies, and use cases like Smart Contracts, Non-Fungible Tokens, and Decentralized Finance. All of them are key tools of digitalization, so stay tuned.


Artturi Tarjanne