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The blockchain industry faces a moment of truth as high-profile projects go live

October 21, 2020, 2:30 PM UTC

In 2017, elite teams of computer visionaries raised large sums of money to pursue even larger ambitions. They announced plans to use blockchain technology to remake the Internet and disrupt powerful incumbents like cloud giant Amazon Web Services—even as the rest of the world, including many in the tech industry, puzzled over what they were talking about.

Three years later, these projects—with names like Polkadot, Filecoin and Dfinity—are reaching a critical juncture. They have built giant software networks with nodes around the globe, offering services like file storage and online contracts to anyone with a computer. But building it doesn’t mean anyone will come.

Even as Bitcoin enjoys another boom—the price of the original currency is nudging $12,000 and everyone from Square to Harvard University has been investing in it—the broader world of blockchain is still struggling to prove the technology is more than hype.

Dreams of a new Internet and a ‘world computer’

During the madcap cryptocurrency bubble of 2017, blockchain startups conducting Initial Coin Offerings (ICOs) raised more money than those that turned to the traditional world of venture capital. The ICOs touted the promise of blockchain, a new type of distributed computing that creates a permanent, tamperproof record of transactions.

In many cases, the ICOs were pushed by hucksters who exploited a lack of regulation to sell digital tokens to a greedy, gullible public. The tokens in question represented equity in future blockchain projects but, in practice, were treated mostly as speculative investments. In many cases, the ICO issuers never built what they promised, and the tokens tied to the project became basically worthless.

The scams and subsequent law enforcement stings left a stench of disrepute on the broader crypto industry—one that has helped obscure the real progress made by ventures like Filecoin and Polkadot.

Unlike the slapdash nature of many blockchain projects launched in 2017, Polkadot has attracted elite computer scientists and its investors include funded by prominent venture capital firms, including Polychain Capital. The project is the brainchild of Gavin Wood, a Ph.D. programmer who cofounded Ethereum (the second most popular blockchain after Bitcoin) and has consulted for Microsoft.

Like Ethereum, Polkadot is a platform for activities ranging from application building to automated transactions known as smart contracts. Both blockchains aim to provide a secure record of all transactions that is visible to the public.

Wood believes Polkadot is a superior alternative to Ethereum that avoids the latter’s sluggish processing times, while offering an easy way to connect to other blockchains. In an interview with Fortune, Wood pointed to a high rate of developer participation—a metric many in the tech industry use as a proxy for a project’s popularity—as a sign Polkadot is taking off.

Meanwhile, Filecoin launched its so-called mainnet last week, more than three years after raising $205 million in an ICO and assembling a crack team of programmers and tech industry veterans. (A mainnet launch, which follows a “testnet” phase, is when a blockchain becomes accessible to the general public. )

Filecoin, which is likewise backed by blue chip VC firms, offers a decentralized form of computer storage. Instead of using cloud providers like Amazon Web Services or Microsoft Azure, consumers and businesses can park their data on a network of computers linked with a blockchain. At the same time, anyone with spare computer space can rent it out for use by Filecoin’s storage clients in a process the project claims is totally secure for all involved.

Then there is Polkadot rival Dfinity, which touts itself as a “world computer” that can replace cloud computing services and applications offered by Microsoft, Google, and Amazon. The company raised over $100 million from Andreessen Horowitz in early 2018 and also has a stable of top computer scientists. It recently unveiled something called the Sodium network, which provides the economic incentives and governance tools intended to make the world computer.

Unlike the other megaprojects, Dfinity has yet to issue the tokens that will let users operate its service. But TechCrunch reports the tokens are expected to be worth over $9 billion—which would make them the fourth most valuable cryptocurrency. Meanwhile, the tokens of Polkadot and Filecoin are already circulating, valuing the projects at around $3.5 billion and $470 million, respectively.

These projects, along with another mega-endeavor called Cosmos and the crypto-industry workhorse Ethereum, all employ different programming techniques. But they also offer many overlapping features and share a common ideal: replacing the web of today, and the companies that control it, with decentralized networks run on blockchain software. If what they promise comes to pass, many of us will come to use their version of the web—often dubbed Web 3.0—to do everything from online banking to social networking to payroll processing. What’s more, Web 3.0 boosters claim, all of this will be more secure and less expensive than the tools offered by the likes of Microsoft and Facebook.

The vision is audacious and is being backed by some of the smartest programmers and tech investors in the world. But for now, the number of participants in Web 3.0 is staggeringly small; three years in, the most successful new projects might boast 10,000 users (Facebook, in contrast, has nearly 3 billion users).

These tiny numbers don’t necessarily mean the second generation of blockchain projects won’t become mainstream. As crypto evangelists regularly point out, most people in 1994 didn’t see the point of the Internet, even though the underlying technology had been around for decades. But now that the likes of Filecoin and Polkadot are up and running, the window of time for blockchain to prove its usefulness may be shrinking.

The search for a killer app

Finding an impartial opinion on blockchain projects isn’t easy. Of the many financial and tech analysts that assess companies for a living (and offer their assessments to reporters), few understand the technology well enough to explain how they are faring—or even what they do in the first place. On the other hand, the people who are familiar with projects like Polkadot are often holding tokens they hope to flip or are simply buoyant about anything blockchain-related.

One exception is Wilson Withiam, a former premed student who is now an analyst at crypto research firm Messari. Withiam, who owns Ethereum but none of the tokens from the newer projects, acknowledges that the crypto community struggles to converse outside its own bubble—where insiders enjoy regaling each other on Twitter about a fantasy world without central governments.

“It’s a legit question, especially when many people have a crypto anarchist standpoint,” says Withiam. “We get lost in our own little crypto world sometimes. You try to talk to anyone outside of the industry, they look at you like you have three heads.”

In the case of the 2017 class of blockchain projects, Withiam says they all have thriving communities of developers, which is, he adds, critical to their viability. But he also notes that using these blockchains and the decentralized apps built on top of them remains an arcane experience for the average Internet user, and that mainstream adoption won’t happen until people can use them with the same ease as a web browser.

There’s also the question of why people would bother with these blockchain projects in the first place, especially when existing technology options are easy to use and inexpensive or free. Ditching monopolists like Facebook or Google might be appealing in theory, but few are likely to toss their Instagram or Google Drive account in the name of decentralization—a word that is a near-holy invocation among crypto types but irrelevant to the average computer user.

Withiam says the best chance for a breakout among the newer blockchains is in a niche like video games, which already have dedicated communities of tech-savvy users. He points to Flow—yet another blockchain project—that is being developed by a company called Dapper Labs, which is building partnerships with the likes of the NBA and the UFC. Withiam says an inflection point could also arrive if an industry giant like Blizzard Entertainment decided to use a tool like Flow.

Wood, the Polkadot founder, believes his megaproject is different because he has a track record of building actual products—rather than just theorizing about them. He claims a theory-over-product mindset has caused Ethereum to stall under the governance of his onetime cofounder, Vitalik Buterin, a 26-year-old savant who is the most influential figure in cryptocurrency.

“There’s no one who can deliver a product. Vitalik runs the show: He’s an ideator and dreamer but won’t deliver,” says Wood, adding that he and Buterin remain friends.

(In a Telegram message, Buterin rebutted Wood’s claims, pointing to Ethereum’s impending deployment of a new version of its blockchain called Beacon, and to a series of improvements related to privacy and transaction capacity. He also noted that Polkadot had benefited from theoretical breakthroughs developed in the Ethereum community, including the concept of “sharding”—a process where data is distributed across multiple locations to process it more efficiently.)

Such debates over which blockchain is superior are unlikely, however, to resonate with most average computer users, for whom the entire concept of blockchain is fuzzy to begin with. The point is not lost on Marvin Ammori, a lawyer who left a prominent perch as a public policy advocate in Washington, D.C., to become general counsel of Filecoin’s parent company, Protocol Labs.

“There’s a ton of hype in this market. There are a few projects seen as the best, most respectable projects, and those get even more hype,” says Ammori. “But until we’re changing the way the Internet works, we can’t make all these grandiose claims.”

Ammori is also aware of an incentive problem inherent in many blockchain projects. Unlike typical startups, which must scratch and claw to reach milestones that will unlock more funding, many blockchain firms raised tens or even hundreds of millions at their inception—meaning their executives can enjoy their wealth and coast for years without having to finish what they pledged to do. Ammori says that the risk of these perverse incentives is overstated and that the eye-popping numbers raised by some ventures—including Filecoin’s $205 million ICO—are not so meaningful given that many successful tech startups raise significantly more, albeit over a longer period of time.

Ammori also believes projects like Filecoin—which counts the Internet Archive and a growing number of small businesses among its users—will succeed because they disrupt middlemen, a formula that has worked for many other new technologies. He believes that, just as email proved to be a “killer app” that sparked mainstream adoption of the Internet, the blockchain world will soon deliver a must-have tool of its own.

“The [blockchain projects] don’t all have to succeed at once,” he notes. “Just as Facebook started with a handful of college dorms, all it takes is one use case to catch on.”

An earlier version of this story listed incorrect valuations for Filecoin and Polkadot, and misidentified one of Polkadot’s investors.

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