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Jake Yocom-Piatt is the Project Lead of Decred, a hyper secure, adaptable and self-financed digital currency.
The following is an exclusive contribution for the 2018 year of CoinDesk under consideration.
In 2018, we saw the capital cap of the cryptocurrency shift from the historical highs of January to a decline of 80% by December, despite the few changes in the context of technological fundamentals.
If little has changed with the fundamentals, then there must be other factors that drive the manic purchase and sales cycles of panic present in these markets? A persistent pattern that I have observed in the context of investors and projects in space is that of information asymmetry.
This information asymmetry manifests itself in various contexts, e.g. be a very knowledgeable or very uninformed investor, the ability to determine if a project has overpromised on its technology products or not. Another way of looking at this asymmetry is that it derives from hidden complexity, whether we talk about perceiving value in a resource or implementing new software.
While I can describe bitcoins in a single phrase as "gamification of time-stamping", describing and providing a working system that implements this concept is a serious technical challenge.
With Decred, we experienced this hidden complexity in the first person as we built Politeia, a filesystem ordered for the time, to be used as our proposal system. Making the cryptocurrency markets less volatile and more substantial projects is to do everything possible to eliminate the information asymmetry that derives from technological complexity, both with investors and with software.
Complexity for investors
I have observed a very bimodal distribution when it comes to the extent to which cryptocurrency investors are informed. There is a minority that is incredibly well informed and a majority that is quite uninformed.
This knowledge gap often benefits well-informed people at the expense of the uninformed, so the former are incentivized to maintain this agreement. Similar to many other markets, the less informed pursue the carrot of easy profits ahead of them by those better informed. When this behavior similar to a herd is combined with relatively subdued markets, it creates severe volatility, which has much in common with over-the-counter ("OTC") stocks.
The perception of value drives the decision-making process of investors, so the collective psychological state of investors determines the value of an asset. Unlike many other assets, the fundamentals of cryptocurrencies do not change substantially as a function of time. This constancy of fundamentals is an important driver for the use of cryptocurrencies as a store value ("SoV") on longer time scales.
It is this SoV property that separates cryptocurrencies from OTC securities and determines a longer periodicity that is not present in most OTC stocks. Many uninformed investors are eager to buy low and sell highs, earning a profit in fiat terms, while well-informed investors understand that the SoV property is a long-term game, which encourages them to buy down and avoid liquidating their positions.
Informed investors using cryptocurrencies like SoV feed these longer-term boom-bust cycles, so episodic surges in the valuation occur without the value falling to zero after each phase of manic purchase.
Complexity for projects
After managing several software projects over the last decade, I can say that even if someone who participates on a technical level, it is easy to overpromise deliverables.
The main driver of this disconnection between promises and quality work code is the hidden complexity of the cryptocurrency development process. In recent years, I've seen many projects make huge promises and increase incredible amounts of capital in ICO and similar processes, just to not deliver, deliver incredibly late or deliver hardly functioning software.
Similarly to the situation for investors, the projects have a bimodal distribution of technical skills: a minority that keeps their promises approximately in line with what they can realistically offer and a majority that roughly overlaps on a regular basis. The overpromess on software products is often the result of a combination of underestimation of the complexity of cryptocurrency software and conscious overvaluation on part of the project leads.
Since the domain of cryptocurrency software is still quite new and complex, there are correspondingly few people who are well adapted to understand what can and can not be achieved in a given period of time, on a technical basis. So, a project can make really impressive statements about what it will do, but when there are so few people who are able to realistically assess how achievable the statements are, it encourages the malicious actors to invest in actions of change.
Numerous projects funded by bait and switch saw their ratings collapse throughout 2017 and 2018 once investors realize they are unlikely to be able to assert their demands.
Complexity in practice
As Decred's Project Lead, I am familiar with the process of managing complexity from a technical and management point of view, and our out-of-time chain file system, Politeia, is a good example of how hidden complexity can also delay development seasoned teams in space.
Our goal was to turn Politeia into production as our proposal system in about 12 months from the start of the project in April 2017, and we did not enter production until six months after the scheduled date of the project. October 2018. Despite having built on a working version filesystem, git and trying to avoid complexity, it still took several months to get the right metadata formats and make the frontend work properly.
Politeia is based on a rather simple idea "to create an off-data archive of data in which it is possible to demonstrate who said what to use when using cryptography and an existing blockchain."
Once divided between its components, it does not seem very difficult:
- Create episodic stand-alone timestamps using the Decred blockchain
- Users' identities correspond to keypaires in a PKI system
- The user messages are all signed by the corresponding private identity key
- High and low grades are a special form of user message
- Track user ticket votes based on the Decred ticket pool snapshots
This list is quite short and each component is relatively simple, but managing the border and corner cases that occur between these components quickly becomes non-trivial. Although the final implementation of the work is complex, it can be described as a handful of simple components that even the less informed market operators can understand.
Simplicity for investors
There are a myriad ways to become a well-informed cryptocurrency investor, but after doing my missteps, I have some simple policies that can help you reduce part of the complexity:
- Stay skeptical – When someone makes extraordinary claims, they must provide extraordinary evidence. If any statement made by a project seems too good to be true, see what someone outside that project has to say about it and try to understand more about how it will make the request.
- Do your research – There is no substitute for doing some self-directed research on a project before investing in it. Also in my case, as someone who has worked in space for almost six years, I still need several hours to do a good job by impressing another project and understanding their value proposition in detail. Are there any other projects that need a similar niche? What makes this project better than others in the same niche?
- Calculation of the cost of the dollar – Not everyone is able to dictate the program on which they acquire cryptocurrency, but I recommend considering an approach based on the average cost of the dollar, in which you make regular purchases for a longer period of time. It is difficult to buy at a local minimum price, so rather than charging at a single price, you regularly buy on a wide range of prices. In this way, you are not tied to the psychology of having bought everything at a single price, and you can lower the average purchase cost by buying the prices.
- Psychological frequency – As discussed above, there is a periodicity present in the cryptocurrency markets that is not present in other similar markets. Before investing, consider that you may have to wait several years before the market rides to the point where you made a good investment. 2018 has had many similarities with 2014 as the historical highs occurred at the beginning of the year and the markets were gradually sold off throughout the year. For most of 2015, BTC / USD was in the 200 and this was an excellent time to acquire Bitcoin. I suspect that 2019 will be similar to 2015, where valuations remain depressed and the market consolidates in the course of the year.
Simplicity for projects
Overcoming the complexity barrier between promises and implementation for cryptocurrency projects is challenging. Here are some policies that have served me well:
- Avoid excessive prices – It is easy to be forced or otherwise convinced that you need to make huge promises to generate interest in your project, financial or otherwise. If you worry about not looking like a doofus later, try to reflect on whether or not your promises can be made public before they are made public. In my case, this did not mean the publication of the expected completion dates for the job, because I often make a mistake when it ends, eg. Politeia. Managing expectations matters.
- Avoid complexity – Once you have set some promises or have chosen a different route to deal with a technical problem, do what you can to avoid complexity and still achieve your goal. Cryptocurrency software is often quite complex, depending on the domain, so it is especially important to keep things as simple as possible. Less complexity means that your software is more likely to be delivered sooner.
Conclusion
Working together to increase our collective understanding, participants in the cryptocurrency ecosystem can take many steps to help reduce market volatility, create more substantial technology, and educate newcomers efficiently.
If 2019 is something like 2015, the cryptocurrency market is in a consolidation phase and in the coming months will continue to shake low-performing projects. Very little has changed with the fundamentals of space, despite the withdrawal of assessments, so I expect a bright and continuous future for cryptocurrencies in 2019 and beyond.
Have an opinion of 2018? CoinDesk is looking for proposals for our 2018 under consideration. News via e-mail [at] coindesk.com to learn how to be involved.
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