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Blockchain needs more failures to grow and mature

Evolution depends on enduring some hard lessons

Growth and improvement in blockchain technology's development will hinge on learning from mistakes and bad turns, as well as experience in general. Growth and improvement in blockchain technology's development will hinge on learning from mistakes and bad turns, as well as experience in general.

In the world of startups, learning from failures is an inescapable reality, and part of the prevalent conventional wisdom. That is how the ecosystem and entrepreneurs move forward to greater heights, and with more successes.

But in the burgeoning blockchain segment, we haven’t seen that many failures yet. At least, not at the scale and variety required to extract long-lasting lessons for the entire industry. And certainly, not enough to warrant a call for an imminent crash or correction.

Failures are important because their sum results in a new body of knowledge that is rich with useful insights and best practices.

An aftermath of real failures can make the whole blockchain ecosystem more resilient, because it will result in revealing the boundaries and realities of what’s possible, useful, absurd, impossible, repeatable, and scalable; out of everything that appears plausible and innovative at the beginning.

There are a few lessons from recent blockchain failures, but not enough.

Ethereum’s ICO bitcoin reserves losses

Lessons: It is a good practice to hedge against cryptocurrency fluctuations, after raising your tokens. [Editor’s note: “ICO” stands for “Initial Coin Offering,” similar in concept to an “Initial Public Offering.”]

Background: In 2014, the price of Bitcoin took a downturn from $600 to $250 right after Ethereum raised their ICO, in essence reducing the Ethereum Foundation’s budget and holdings that were largely kept in Bitcoin. Hedging in cryptocurrency was still not widely practiced in 2014.

The Mt. Gox and Bitfinex thefts

Lessons: Security in cryptocurrency exchanges is extremely important. Although they are improving at it, cryptocurrency exchanges do not have bank-grade security, let alone consumer insurance against deposits. Therefore, users with lots at stake are still at some risk, and need to take the security of their coins storage in their own hands, or at least diversify where they hold their cryptocurrency.

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DAO heist

Lessons: Mixing law and finance in Smart Contracts is not easy, and can result in grave consequences, if the code weaknesses can be exploited. A weakness in the code is not just like a bug that can be forgotten after it is fixed. Plus, you can’t fully automate what you haven’t had a depth of experience in.

More failures needed

These were just a handful of early failures, and there aren’t nearly enough of them. What they have in common is the resulting definitive best practices and real lessons for going forward. But we need more failures, of the spectacular kind.

The ones to expect might fall in the following categories:

• ICOs that raise money, but don’t deliver, a year or two after launch.

• Entrepreneurs that default on their promise to bring a product to the market.

• More scams, thefts, and plain stupid moves.

• Attempts to apply the blockchain or tokens where they don’t fit.

• Hypotheses with exaggerated claims where the blockchain is the hammer, and everything is a nail.

• Lack of transparency resulting in delayed surprises that reveal the emperor had no clothes.

There are other areas where we need to see more clarity. These aren’t failures, but they are developing subjects that could benefit from some standardization of best practices. Among them:

Ratios of token ownerships: Is 20% the maximum that a foundation/protocol or ICO app should keep? What if they control 80% of the tokens?

Governance of token-based organizations: What is the right model for open, transparent, public practices around decentralized cryptocurrency governance?

Valuations: The rush to ICOs is causing valuations to leap forward, ahead of value—whether they are protocols, software solutions or applications. To what extent will market tolerance persist without serious repercussions?

Waiting for second acts

Many blockchain project categories are in the first renditions of such attempts to apply blockchain technology. Typically, second iterations have higher success rates, and reach higher grounds.

• Amazon and YouTube were not the first attempts at e-commerce or video broadcasting. Previously launched similar service offerings failed, and gave precedence to the eventual success of the two aforementioned giants.

• Ethereum was conceived after seeing some limitations in Bitcoin and colored coins.

• Steemit was Dan Larimer’s second act, after lessons learned from Bitshares.

Let’s not forget that the Web’s early years were filled with spectacular failures.

Webvan, Pets.com, eToys, Flooz, Dr.Koop.com, and Kozmo are some of these failures. They each carried lessons in avoidance, and their second-act derivatives were much more successful.

In sum, it would be OK to push the limits further in order to witness a greater intensity of failures. It would be acceptable to overshoot beyond what’s possible, so we can regroup and see the real playing field.

If we agree that an eventual crash is inescapable, that crash typically happens only after many mistakes are made.

It is my opinion that we will need to see more, bigger, and more-damaging failures in order to complete the circle of madness and early recklessness that accompanies early market formations, including the need to see more startups shutting down. Only then, can we start to predict that an imminent crash possibility is around the corner.

I would really like to see more of these failures and excesses, in part to rush the crash, but also to amass the lessons we need to learn, in order to continue growing further ahead.

If we do that, we would complete the circle of madness and early recklessness that accompanies early markets formation, and once again prove the validity of Carlota Perez’ perennial model.

William Mougayar

William Mougayar is a Toronto-based investor, researcher, blogger, and author of The Business Blockchain (Wiley, 2016). He is a direct participant in the crypto-technology market, and an advisor or board member to some of the world’s leading blockchain organizations, including Ethereum, OpenBazaar, Coin Center, and Bloq. He blogs regularly about the present and future of blockchains at Startup Management.

View Mougayar's recent TEDx talk about the blockchain

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