When it comes to the recent surge of interest in the cryptocurrency market, I’m either an idiot or prescient. Granted, my critics will emphatically state the latter. Nevertheless, I’d like to extend my skepticism for all things blockchain with my next assignment, VeChain (CCC:VET-USD).
Immediately, expressing incredulity toward the cryptocurrency market seems ridiculous. As with electric vehicles, it appears that the majority views the blockchain as the future of connectivity technologies. It’s not hard to see why. With VeChain, the underlying VET asset is tied to the evolution of digitalization and the radical paradigm shift of a decentralized trust model.
When Bitcoin (CCC:BTC-USD) first graced us with its birth, it quickly proved not only the viability of peer-to-peer (P2P) networks but also a digital, decentralized economy that could run independent of mainstream institutions. In other words, we could trust BTC primarily because it was not endorsed by a central authority such as the Federal Reserve or the Bank of Japan but by public consensus.
It’s no hyperbole to say that Bitcoin is the people’s money. But blockchain technology can do so much more than act as a P2P platform. That’s where Ethereum (CCC:ETH-USD) comes into the picture. Through its smart contract technology, users can eventually rid themselves of cost-sucking leaches like attorneys and brokers. Put another way, Ethereum is the people’s intermediary.
Where VeChain has gained popularity is its niche business category. As Coinmarketcap.com simply describes it, VET “is a blockchain-powered supply chain platform.” Specifically, “VeChain aims to use distributed governance and Internet of Things (IoT) technology to create an ecosystem which solves some of the major problems with supply chain management.”
Distributed governance — that’s just a fancy term for community-driven consensus. It’s the people’s supply chain system.
You should be asking yourself: who the heck asked for this?
Consider Basic Fundamentals Before Buying VeChain
I’m clearly missing something here, which bothers me for the implied bifurcation. As I said, I’m either an idiot or prescient.
It bothers me even more for the fact that very smart people seem attracted to VeChain. For instance, Mark Hake — who could be the smartest contributor to InvestorPlace — wrote recently that “VET-USD is one of the few that will survive as it has a viable blockchain platform.”
You have Tezcan Gecgil, who mentioned that VeChain could have huge potential in 2021. Bolstering her argument, she cited Pietro Palamara of the School of Industrial and Information Engineering, the Polytechnic University of Milan, Italy, who seems enthralled at VeChain’s potential for “completely eliminating the threat of the market of counterfeit goods.”
Lastly, you have David Moadel, who mentioned that VeChain’s supply chain and logistics focus is “a largely untapped opportunity that could turn out to be quite lucrative.”
I’m shocked that no one has apparently asked the very basic question: who will pay for this supply chain?
In a centralized environment — that is, the environment that we’re all used to — the answer for who will pay is typically corporate customers of a blue-chip company like Oracle (NYSE:ORCL) or SAP (NYSE:SAP). Enterprise-level clients pay these firms billions of dollars and they handle their supply chain needs.
In a decentralized model, however, clients will pay the people (i.e., crypto miners) to provide supply chain services. But the rewards must have economic value — no one’s going to provide the backbone of supply chains and logistics for free, especially not for enterprise-level clients that require terabytes of constant data transactions.
Don’t get me wrong — the VeChain blockchain project can work effectively so long as the rewards are commensurate with individual node’s time/energy expenditure. But if the underlying VET market valuation is tied to speculation (I will argue it is), then this distributed demand-based model can fall apart in a hurry.
It’s All About Unavoidable Economic Principles
When I was a W-2 employee — toiling in “hard pants” and a shirt-and-tie, I worked with both Oracle and SAP supply chain and logistics software. In my experience, they weren’t the most efficient platform though they got the job done. One thing I was sure about is that neither Oracle nor SAP lost sleep about the value of the dollars we were paying them.
For instance, if XYZ Corp. paid Oracle $1 billion to manage its supply chain, that $1 billion has a purchasing power range that generally stays consistent. But if XYZ were to pay Oracle one billion units of VET, what exactly does that mean? One day, those billion units could be the equivalent of a billion dollars. The next day, they could be the equivalent of zero dollars.
I’m being hyperbolic but that’s really the monetary and economic equation involved with VeChain and every blockchain enterprise. Yes, distributed governance sounds sexy because it’s so clinical and non-human. But when we realize that real human beings form the basis of distributed governance, that’s where things get tricky.
Would I incur a cost of $3,000 to get 0.5 BTC at current market value? Abso-freakin’-lutely I would. But would I do the same for a million random coins or tokens? I’d really have to think about it and the answer would probably be “no”.
What I’m trying to say is that don’t merely focus on the technological underpinnings of VeChain. That’s the easy part. The more difficult component of the blockchain equation is the economics. Again, who’s going to pay for this?
On the date of publication, Josh Enomoto held a LONG positions in 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.