You invest in a project proposing a solid and inventive solution to a known technical problem. Six months later, long before launch, a much better solution to the same problem is unveiled by someone else, destroying the chances of broad adoption for the original idea and killing your investment. This is obsolescence risk, and it is especially pertinent to cryptoinvesting because of how fast this space tends to move.
How can one manage this risk? Obviously, it is completely impossible to predict whether a better solution exists before it is actually found. But the extent to which companies are subject to this risk varies broadly, and you can qualify the difference.
Here is a one-sentence summary of my “social protocol” thesis. Companies building new social infrastructure are not as susceptible to obsolescence risk as companies solving a narrowly-defined technical problem. The intuition is this: if I come to you and say “I have a better technology for social networking than Facebook”, you will laugh me out of your office. Facebook is an extreme example of social infrastructure. It is simply irrelevant how it achieves its technological needs, as long as it achieves them at the scale required.
The opposite side of this spectrum is exemplified by any team that designed a “YACA” — “yet another consensus algorithm”. A consensus algorithm, while it may be faster, better, more decentralized, and less expensive than its predecessors, is highly vulnerable to obsolescence. It can be easily superseded if something better emerges.
To put this another way, once the technical problem is well-defined (need more speed? distributed computation? large scale storage? economic stability?) you are subject to obsolescence risk. Clear technological needs are by definition a result of practical experience that a social system had with some existing solution. This means that “technologically well-defined” and “socially non-innovative” are more or less synonymous.
If, on the other hand, the problem is not easily defined (micropayments? blockchain-based legal contracts? DAOs? identity?), it likely means you are dealing with the need to design social infrastructure, and, consequently, there is no best solution you can easily identify. One system does not obsolete another, but merely enters into fair competition with it. Such solutions are by definition highly unpredictable, which, counterintuitively, makes them more investible, at least from the standpoint of obsolescence risk.
Another name for improvements that do not offer new social infrastructure is “incremental change”. Often, changes of this sort are led by incumbent companies adopting the new solution. Ethereum adopting SNARKs is a good example of this.
Conversely, an idea or solution that carries with it a change in social infrastructure constitutes “disruptive innovation”. bitcoin is disruptive to banking not because it is better, faster, or easier to use (it is decidedly not!). It is because it establishes a new social norm, a shared view that individual agency and financial freedom are more important than social conformity. It provides people with an unprecedented answer to their needs, and this, too, is a social aspect of its genius.
One issue with decentralized technology, unfortunately, is that adopting even simple incremental changes into an active decentralized network is orders of magnitude harder than building a brand new network that has them from the get go. This is because decentralized software lacks agility in ways traditional software does not. This dynamic further increases obsolescence risks for decentralized projects, networks, and organizations that are dependent on solutions to concrete technical needs, rather than seek answers to important but hard-to-define non-technical problems.
This framework is more art than science. But here is the main question a cryptoinvestor might want to ask him- or herself when examining a project for potential obsolescence risk.
Is the project solving a need that is technological in nature and is characterized by well-understood and objectively measurable parameters, or is it solving a social need, described in human, legal, or economic terms?
If former — it is incremental and vulnerable, if latter — it may be disruptive and persistent.
Examples of efforts vulnerable to obsolescence: , , .
Examples of efforts that are less vulnerable: , ,
Let me be clear. When I put a project into the incremental (technical) category, I don’t in any way mean to imply that it lacks value or significance. Conversely, when I put a project in the disruptive (social) category, I am not at all implying that it is overall less risky or somehow more assured of success. In fact, it is the opposite. Projects in the social category are far more likely to fail than those in the technical category, if by fail one means “not even come close to carrying out its mission”. At the same time, the success of the projects in the social category is more sticky and potentially brings higher upside, as compared to the easy-to-understand and easy-to-define technical projects.
Investing is hard, and cryptoinvesting is even harder because many risks associated with cryptoassets are exotic and endemic to our industry. Don’t follow crowds and extrapolate from the past. Think for yourself and look into the future. Good luck!
Disclaimer: Neither the author of this article, nor CoinFund, provide investment, financial, or legal advice. The content provided on this site is for informational and discussion purposes only and should not be relied upon in connection with a particular investment decision or be construed as an offer, recommendation or solicitation regarding any investment. The author is not endorsing any company, project, or token discussed in this article.
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