The cryptocurrency industry may need a severe market downturn, akin to a forest fire, to eliminate unproductive projects and reallocate resources effectively. Experts draw parallels to past tech cycles where crashes paved the way for innovation. Without such a reset, crypto risks stagnation from overfunded initiatives.
In natural ecosystems, periodic fires clear underbrush and enable forest regeneration, a process mirrored in technology sectors. Dion Lim observes that the dot-com bubble cleared space for survivors like Google, Amazon, eBay, and PayPal during Web 1.0. The 2008-2009 financial crisis similarly fostered growth in social and mobile technologies, benefiting companies such as Facebook, Airbnb, and Uber, along with Y Combinator's alumni.
Speculative investment bubbles serve to burn away non-productive capital, reallocating resources to viable ventures. Lim notes that in traditional economies, talent shifts from failed firms to promising ones; for instance, many of Google's early employees came from unsuccessful Web 1.0 startups. Crypto, however, shows less of this mobility. Projects like Polkadot, in its sixth year, generated just $72 in fees yesterday yet employ 482 full-time developers and 1,404 contributors.
Over-raising funds exacerbates the issue. Golem, an early crypto project, raised 820,000 ETH in its 2016 ICO and retained 231,400 ETH as of last year. Cardano holds about $700 million in ADA tokens in its treasury, ensuring indefinite funding without pressure for efficiency. Collectively, crypto protocols hoard billions in capital, lacking incentives like shareholder activism or earnings targets to deploy it productively.
Ben Thompson expresses similar concerns about traditional tech giants such as TSMC, Nvidia, and Alphabet, which dominate and risk ecosystem stagnation. He argues for embracing bubbles to reintroduce risk: “You don’t get upside risk without downside risk.” Lim warns, “Growth becomes difficult when everyone’s roots are tangled,” suggesting that without a market conflagration to uproot zombie projects, capital and developers remain trapped, hindering crypto's evolution.