We have not written anything about blockchain or crypto for many years. That is largely due to the fact that we have been working deep inside the bowels of the crypto world for that time. We did not want to participate in the immense amount of self-promotion for which this scene is infamous. But we because we have now taken a step away from it, and in light of the market sell-off, we have a few thoughts on the subject.

First, we will be the first to admit that the whole space has a massive mismatch between valuation and commercial reality. Even today, with Bitcoin down 60% year to date.

People – friends, family, clients – often ask us our thoughts on the space and our answer has become some version of this not quite scientific analysis:

• 49% of crypto projects today are beautiful science projects, with incredibly elegant systems built by some of the smartest people out there, but possessing no commercial prospects.
• Another 49% are outright scams and frauds perpetrated by bad actors.
• Both categories are worth $0.
• That being said, that remaining 2% is going to be worth a lot of money.
• So the problem for everyone in the crypto space is figuring out what comprises that last little bit.
• Our friends in the RF space would call this a very challenging signals to noise ratio.

And we say this from a position of belief. We are believers in the utility of the blockchain. It solves a very real problem, and that solution potentially opens up the door to some important new ways of organizing software systems and commercial relationships.

So we offer this in the spirit of constructive criticism, not a knee-jerk Schadenfreude like so many of the crypto-bashing commentators have been engaging in this month.

One of crypto’s great weakness is the ease of attaching economic value to the systems. The whole blockchain is built on the notion of exchangeable tokens. And while this has some advantages it also became a backdoor (with flashing neon lights) to all the fast money bad actors on the Internet. Too much money got thrown at the community, far too quickly.

Spend time with most crypto projects and this becomes painfully obvious. There are dozens of coins out there with 8 and 9 figure valuations who lack a business plan. This factor has become so ingrained in the community to the point that when we have pitched projects to serious crypto investors they struggled to comprehend why we were presenting a business model. They had never seen one in a pitch before. And their valuation methodologies are like the figurative finger in the wind. We are not besmirching any of the serious people in this space, there are many honest, diligent people working here, but as Gresham’s Law says – bad money drives out good money.

Another serious symptom of the industry’s problem is the fact that almost universally, the only projects beyond the top two that have real revenue are trading mechanisms – exchanges, derivatives, etc. Chase down the revenue of any project and it is very hard to find any non-finance revenue. In itself, this is not alarming, start-ups should not be expected to generate billions of revenue in their first years of life, but the attention is always focused on those projects generating big revenue and those are finance all the way down. And when you ask people who are making millions in trading revenue what is the actual economic activity underpinning all those securities they never have a good answer. In this now infamous episode of the excellent podcast Odd Lots, Sam Bankman-Fried, the CEO of FTX a major crypto exchange, explains that “decentralized finance” (DeFi) is essentially a ponzi scheme, a black box that people put money into hoping someone else will buy it from them. An answer so brutally honest that it left the very cynical Matt Levine speechless.

But as we said above, this does not mean all crypto is bad. Everyone has just forgotten what the invention of the blockchain actually brings. These solve a very specific computer science problem – how two parties can both come to agreement on something even when they do not know or “trust” each other. There is utility in that. It could change the world, but probably (hopefully) not the way so many of the shills are promoting. There are many use cases where this is useful, maybe even important. The key is that even though anything can be built on a blockchain, most things do not need to be built that way. Blockchains are not a magic wand that solve everything, they are just a good tool for certain situations.

After all of this, it is easy to be super-cynical, but crypto is just another Bubble. The future of the blockchain will not be as all-encompassing as the hypsters promise, but nor will it be entirely relegated to the dustbin. The only difference between the recent Crypto Bubble and the 1990’s dot.com Bubble is scale. In the early days of consumer Internet, we heard all the same predictions of a world remade, a new economy powered not by tokens but eyeballs. Crypto drew in a lot more money, from a lot more people, but just as the 2001 crash did not eradicate the Internet, today’s crash will not be the end of crypto. And in a backwards sort of way, the current crash has the potential to be that hard rain coming down, cleaning out the streets, leaving room for the substantive projects to build with a much clearer signal.