With the recent severe correction of the cryptocurrency market, many investors have had some time to reflect on the various underpinnings of this burgeoning digital asset base. Primarily, can alternative crypto coins or altcoins like EOS (CCC:EOS-USD) finally deleverage themselves away from the Bitcoin (CCC:BTC-USD) anchor and trade based on their own fundamentals?
Theoretically, the answer should be a resounding yes. More than a decade ago, Bitcoin entered our plane of reality, offering a new methodology of peer-to-peer (P2P) networking.
Rather than having the trust model consolidated into a central authority (such as a P2P platform developer), Bitcoin changed the paradigm entirely by decentralizing and distributing trust to public nodes.
In other words, the people control Bitcoin, not a person arbitrarily defined as an administrator. From there, other altcoins including EOS took this simple but profound concept and integrated it with other applications.
According to Coinmarketcap.com, the ethos behind EOS was to facilitate the development of decentralized apps or DApps for short.
My InvestorPlace colleague Ian Bezek stated that EOS strives to become the Palantir Technologies (NYSE:PLTR) of the blockchain industry. Personally, I look at it as the Wix.Com (NASDAQ:WIX) of blockchain: the platform gets people up and running quickly with new digital technologies, in this case DApps.
Whichever way you want to look at it, we both agree that EOS represents the next wave of blockchain integration. The first wave was the P2P economy that Bitcoin revolutionized. Now, we’re in a phase where DApps can potentially spark radical changes in other areas and applications (i.e. smart contracts).
Moreover, Bezek notes that prominent individuals — billionaire Peter Thiel being the most recognizable — support EOS. Thus, my colleague suggests that this crypto coin is about betting on the jockey and his excellent track record.
But before you place your wager, you may want to consider the bigger picture.
EOS and Most Cryptos Lack Anything Special
Long ago in his standup routine Bigger & Blacker, Chris Rock joked that back when he was a kid, all he had was Robitussin to cure whatever ailed him. Asthma? Robitussin. Cancer? Robitussin. A broken leg? Rub some ‘Tussin on it.
In this context, the blockchain concept itself is becoming the Robitussin for everyone’s business problems. You need to increase revenue? Blockchain. Have cybersecurity issues? Blockchain. Vast social inequities got the country down? Put blockchain on the case.
While you might think I’m being facetious, the euphoria behind cryptocurrencies caused many folks to lose their bearing. Therefore, I can understand why people love EOS and other coins/tokens based on intriguing blockchain projects. However, at some point we need to ask, are blockchain-based solutions even effective?
According to a Wired.com article that went live mere months before the novel coronavirus pandemic, the answer to that question is very hazy. For many applications, mainstream centralized platforms perform better. Also, customer service is just a phone call away.
Who are you going to call regarding a DApp built on the EOS infrastructure? I have a feeling Peter Thiel has better things to do than to have that potentially never-ending conversation.
Further, decentralized apps require a public community to form the basis of the blockchain’s trust model. Otherwise, they wouldn’t be decentralized but centralized.
The problem with decentralized platforms is that you’ve got to keep the public community interested. If not, they’ll leave and the blockchain project dies.
That’s the fundamental challenge behind the second movement of Ethereum (CCC:ETH-USD). As ETH becomes more popular, the coin’s developers want to make its transactions more efficient. Of course, but that would lead to lower profits for miners.
If the developers don’t find a happy medium, even mighty Ethereum could fade into irrelevance.
The Blockchain Conundrum
I’ve been thinking about the blockchain industry for weeks now, and I’ve so far arrived at a basic conclusion: decentralization is like a guitar. It needs tension to work. In this case, the tension is inefficiency.
A guitar isn’t just a piece of wood with strings on it. Rather, it’s an engineering masterpiece, with each string wound to a certain specification. Without proper tension, you would not get the tones out of the musical instrument.
Similarly, a blockchain must have certain inefficiencies involved to provide people jobs in managing those inefficiencies. As a reward, they receive crypto tokens. Additionally, there must be a viable economy behind the blockchain project; otherwise, who would want to expend effort and energy to receive worthless coins or tokens?
Clearly, the market right now values EOS as a nearly $6 billion economy at time of writing. But whether that status holds true is a big question. On a related note, I don’t think we should be surprised that Bitcoin carries so much influence in the crypto market. BTC has ample inefficiencies and massive volume behind it.
Will the same be true for EOS? It’s possible. But then again, EOS isn’t the only DApp game in town.
It isn’t unique and it might not even be effective because the blockchain itself is not effective for certain applications. With so many variables involved, you should be extremely cognizant about what you’re buying.
On the date of publication, Josh Enomoto held a LONG position in EOS, BTC and ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.