By Jamari Mohtar
Across the Straits
Focus Malaysia | Feb 3, 2018
On January 15, the head of the Monetary Authority of Singapore (MAS) expressed the hope that the technologies underpinning cryptocurrencies such as blockchain would not be undermined by an eventual crash in the virtual currency. “I do hope when the fever has gone away when the crash has happened, it will not undermine the much deeper, and more meaningful technology associated with digital currencies and blockchain,” said MAS’ managing director, Ravi Menon, at a UBS Wealth Insights event in Singapore.
That statement of Menon has kept me thinking hard on the relationship between cryptos and the underlying technology behind their creation, the blockchain.
While some business leaders, bankers and regulators talked in a schizophrenic manner as if the two (cryptos and blockchain) are unrelated in the sense of professing their deep love for blockchain and, at the same time, their equally deep disdain for cryptos, regulators like Menon and his counterpart in Britain, Mark Carney, are very much aware of the obvious relationship between the two.
How can you condemn cryptos like bitcoin as a fraud and at the same time, absolve the blockchain technology behind their “fraudulent” creation as a blessing, like what Jamie Dimon of JPMorgan did way back in September? By the way, last I heard he has repented. Good of him to repent!
Work in progress
What many seem not to realise in their love affair with distributed blockchain ledger technology (DLT) is that it can’t, as yet, prove as a disruptive technology that will change positively and productively the way we do things now, as it is still a nascent technology.
You can’t even quote any of its use-cases being translated in the realm of reality now, as they are all works in progress.
But it is sufficient for me that the technology is promising when many Fortune 500 companies are beta-testing its use-cases in various aspects of life such as finance, trade and registry.
MAS and the Bank of England (BoE) are involved in extensive research on DLT because they see the systems and technologies underlying cryptos, as an “active area of interest”.
Addressing British parliamentarians, Carney said work undertaken by the BoE’s financial technology accelerator shows the potential value of DLT on a systemic level.
“You get those benefits by stopping at a level much higher than the retail level. You don’t end up with those financial stability risks, you get financial stability benefits. And you save huge amounts of computational energy intensity.”
Despite this, both the BoE and MAS are not in a hurry to embrace the new technology. Speaking for BoE, Carney said: “We’re also disciplined. If we’re going to apply something to the core of the system, it’s going to need to meet five sigma quality rating.”
Sigma rating – the highest being six sigma – refers to a set of techniques and tools for process improvement in the quality of output by identifying and removing the causes of defects and minimising variability in manufacturing and business processes.
Introduced by engineer Bill Smith of Motorola in 1986, Jack Welch made it central to his business strategy at General Electric in 1995.
Using a set of quality management methods – mainly empirical, statistical methods – sigma rating creates a special infrastructure of people within the organisation who are experts in these methods by following a defined sequence of steps with specific value targets. These include reducing process cycle time, pollution and costs, and increasing customer satisfaction and profits.
But Carney also issued a disclaimer on his views on a fast-evolving blockchain technology when he said: “What I say on this topic today will be outdated six months from now because things are moving so rapidly.”
Herein lies what many fail to grasp: Because the use-cases for DLT are evolving at a fast pace and haven’t even had the chance yet to emerge as disruptive applications in the real world, the stage is set for the volatility of cryptos in general especially bitcoin, the most famous cryptos of them all.
This accounts for the speculative nature of crypto trading but do you blame cryptos alone for this speculation? The hypes surrounding blockchain technology especially about its disruptive use-cases, which hasn’t emerged in the realm of reality yet, and due to its decentralised and public nature in the known domain, had fuelled the speculation on the value of the digital tokens supporting the blockchain.
This speculation – excessive or not – will abate once the “alleged” disruptive nature behind the use cases of DLT technology become real – as in being applied in the real world.
So where does this schizophrenic logic lie in loving blockchain and hating cryptos in this sordid love-hate affair? It reminded me of the love-hate affair between Malaysia and Singapore under former premier Tun Mahathir Mohamed, which the current premier, Datuk Seri Najib Razak, has decided to consign it to the dustbin of history.
Fundamental of Blockchain
Digital tokens especially cryptos represent a consensus mechanism. They are the means by which the public participates in public blockchain protocols.
If the blockchain protocol becomes valuable due to its promising potential applications in real life, then the digital tokens, through which one participates in it, accrue value.
In this sense, one can view cryptos as having intrinsic value by virtue of being backed both by technology and the use-cases the technology will make possible once the beta testing stage proceeds smoothly.
If the outcome of the beta testing proves to be a failure, then the cryptos that are being supported by the technology will go down in value.
Network effect
The other element fuelling the speculative nature of cryptos is the network effect, defined as a phenomenon where bigger numbers of participants improves the value of a product or service.
The internet is a good example of the network effect. Initially, there were few users of the internet, and it was of relatively little value to anyone outside of the military and a few research scientists.
As more users gained access to the internet, adding more content, information, and services, there were more and more websites to visit and more people to communicate with. The internet became extremely valuable to its users.
Some experts view bitcoin as a social network and that 94% of bitcoin’s price move is explained by Metcalfe’s Law that says the value of a network is the square of the number of its users. It’s an equation that shows as more people join a network, the more valuable the network becomes.
Valued in the billions
Network effect is why Google, Facebook, and Alibaba are worth US$689 bil, US$500 bil, and US$450 bil, respectively. When a network becomes valuable, it attracts even more users.
Ether’s rise to fame (and volatility of course!) is driven by the network effect of the Etherium Protocol, which features a smart contract. To use the Etherium Protocol to write and execute a smart contract, participants in the transaction must have an ether stake in that protocol.
More smart contract-based blockchains have emerged now, with different cryptos such as Cardano, Neo and Cindicator, breaking the Etherium Protocol “monopoly” on smart contract.
Hence, those networks that are best designed for executing smart contracts will get more popular. And the more popular the network, the greater the rise in the value of the network’s cryptos.
However, there are vested interests which realise their businesses or position will become obsolete once the use cases of blockchain technology emerge in the real world.
Negative spin
And these are the vested interests that had, have and will always spin a negative take on cryptos ala divide and rule by hailing blockchain technology as a game changer and pouring scorn on cryptos and crypto trading, when the two are actually very much related and move together in unison.
Their negative spinning on cryptocurrencies is the cause for all the crypto fears to be born – the fears of the FOMO, FOLO and FOB.
To recap FOMO stands for Fear of Missing Out, FOLO is Fear of Losing Out and FOB is Fear of Bubbles.
Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments: editor@focusmalaysia.my
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