Discuss: How will cryptocurrency apps make money?

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Last night, I figured out what might kill cryptocurrency, and it’s not a black swan event. As history suggests, it’s the natural end of the path we’re on today.

A cryptocurrency cautionary tale

In the early days of the internet, developers built vital infrastructure: shared protocols like TCP/IP, HTTP, and SMTP that opened the door for browsers, websites, and apps which we love today. But a limited number of protocols needed to be built, and there wasn’t much money in that work. So, most developers moved on to build apps.

Apps attracted users. They collected user data and sold it to businesses, aggregated user attention and sold it to advertisers, or sat in the middle of user transactions and took a cut. In general, if you could attract a lot of users, you could make a lot of money. As an early consumer app, you could tell investors with a straight face that your plan was to focus on growth and figure out monetization later.

We’re in the infrastructure phase again with cryptocurrecny. But this time, something is very different.

Enough apps had done this like it wasn’t scary. Many people who built internet apps got very rich. But development of the shared protocols that made it all possible atrophied, limping along in the noble and non-lucrative world of open-source software. People groused about the lack of protocol innovation but they followed the money.

Core to the promise of cryptocurrency is that, thanks to tokens, blockchain developers can make money working on protocols! Let’s say you launch a token with new functionality that other developers build decentralized apps on. If those apps grow, the value of your token can skyrocket as a thousand flowers bloom. If you launch your own blockchain, you can also get paid for each transaction made on it. Value accrues to the protocol layer.

This is why so many companies doing ICOs say they’re building new protocols, not just apps. That’s where the money is right now, and smart cryptocurrency founders and investors know it.

We’re in the infrastructure phase again with cryptocurrency. But this time, something is very different.

Suffocated by the invisible hand

I love the story about the guy who spent 10,000 bitcoins on two pizzas. Poor guy. Those bitcoins would be worth US$70 million today.  I bet that’s more money than the revenue of all decentralized cryptocurrency apps combined.

Bitcoin has been on a wild tear recently. I’ve written about why I think this is happening and why the upward trend (with peaks and valleys) is likely to continue. Things like regulation and scaling issues will slow it down. But the economic incentives of bitcoin holders are too strongly aligned to let it die a natural death.

What could kill it outright? Economic counter-incentives.

To simplify, if no one can make money on decentralized apps for lack of a revenue model, no one will build them. If no one builds apps, no one can make money on protocols either. Investors will lose money and stop funding cryptocurrency projects. All the skeptics will be proven right. And the cryptocurrency dream, as we know it, will die—not with a bang but with a whimper. Killed by the same force of economic self-interest that birthed it in the first place.

Choose your weapon

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