An online marketplace that exists more in concept than reality raises $12.5m online in a matter of minutes, valuing it at $300m. Within a month, that has jumped to $2.8bn.
Another project has been set up with a vague promise to help computer owners trade their unused storage space is worth $350m.
These crowdfunding efforts sound like tales from the dotcom boom, when investors chased up the valuations of companies with the mere promise of a business idea to ridiculous heights. The speculative enthusiasm for the projects — called Gnosis, Storj and Golem — is certainly the same. But they are actually part of a far more bizarre financial phenomenon. These are ICOs, or initial coin offerings. Instead of minting shares via an initial public offering, these companies are minting cryptocurrencies.
Anyone participating in sales such as these will receive tokens, theoretically usable in the future in the markets they create. Like all currencies, any value they have will comes from the willingness of people to treat them as a medium of exchange, or to see them as a store of value.
It is easy to dismiss out of hand. The bubble that has blown up in a matter of weeks in so-called alt-coins is the most lurid aspect of a speculative frenzy in digital currencies, including bitcoin. Given that people are literally minting their own money in a totally unregulated market, scams surely abound.
But that would be to miss an important point. Some of the projects are best seen as experiments in radical decentralisation, with a particular focus on the financial industry. If banks and insurance companies thought they could tame the blockchain, these are reminders that the potential exists for a devastating disintermediation.
The alt-coin entities are the simplest of tech companies, releasing nothing more than a small piece of code. They aim to develop cryptographically secure ways to enable transactions between parties that have no other contact or way of authenticating each other online. End users can strike “smart” agreements that are set in code: if certain conditions are met, value changes hand automatically. And if contracts can be encoded and transactions verified and posted on a public blockchain, who needs all the intermediaries?
They are also experiments in distributed governance. Conjured up by small teams of developers, they depend on users trusting that there is a mechanism in place to handle problems, and to allow for future development of the systems.
Of course, there is still a huge chasm between this vision of a pure tech-enabled finance and today’s reality. Bitcoin is a preferred payment mechanism for drug dealers and computer hackers, and has struggled to come up with a way to speed up its underlying infrastructure as a result of disagreements among users.
That’s where the current wave of experiments comes in. Tezos, a decentralised blockchain which hopes to pull off an ICO in June, represents one approach to overcoming Bitcoin’s governance problems. Built into its system are rules to resolve simple disputes, potentially overcoming the free-for-all. And to make it more widely accepted, the code is written from the ground up to make it susceptible to analysis by non-experts, says Emen Gün Sirer, an associate professor at Cornell University and expert in cryptocurrencies who also acts as an adviser to Tezos.
Like the dotcom boom, the massive financial speculation that has broken out is both a blessing and a curse for alt-coin entrepreneurs. The promise of instant wealth has attracted more developers and sparked a boom in creativity, even as it sucks in scam artists and risks burying everything in an avalanche of speculation.
Ripple, which was set up to facilitate international payments and already has a number of big banks as customers, saw the “market cap” of its crypto currency — called Ripples, or XRP — jump tenfold in a month, to reach $13bn. That a piece of financial infrastructure could become the object of such rabid speculation is indicative of the current state of the alt-coin world. But the bubble may blow itself out quickly — Ripple’s currency has already fallen back by a third from last week’s peak.
Tezzies, the name of the digital currency units spawned by Tezos, are due to go on sale in June. They may throw further fuel on the ICO bonfire — or the conflagration may already have burnt out. Either way, the wave of experimentation of which Tezos is a part is not likely to be halted.
Like the dotcom bubble, it will probably take the safe distance of a decade or two to work out how disruptive this technology really is.