Blockchain — Why Care?

Across the start-up investor community there are smart, respectable people scoffing at blockchain and cryptocurrency.

“A scam” “Will lead to tears” “It’s tulip mania!” they say.

Are they right?

Bitcoin pricing over the past 3 years, for example, does look bonkers:

And by wide agreement, Bitcoin and Ethereum have failed to live up to their grandest visions.

This was put well by Michael Yuan at a recent Boston Blockchain meetup:

Bitcoin was supposed to replace money. Ethereum was supposed to be a new software platform for distributed cloud computing. Neither has come true.

Not Purely Hype

What holds them back? Both suffer from high costs to validate and store data.

They do not scale well.

Yet even at low volume, already they are moving markets.

Bitcoin cannot scale into everyday money, because each transaction is so expensive to record. Today it costs $16,000 to store 1MB of data or about $3 to store 200 bytes to represent a single payment.

Yet Bitcoin has found a role… as a secure way to store value that can cross borders and is free of inflation. With a market capitalization increase over $85 billion on paper during 2017 (prices are up from $1,000 at the start of the year to $8,000 in November and leapt to $11,000+ recently) and trading volume of $0.5-$1 billion per day, it seems billions in hard currency were converted to Bitcoin in 2017.

Few people or businesses are using Ethereum in production software. Yet Ethereum has found a role… as a platform by which start-ups can issue tokens to raise capital. This has set off an ICO frenzy. In the past year over $3 billion was funded into ICOs, comparable to total seed investments by VC firms.

Today’s blockchain is like the Model T: an early, crude product that marks a profound change to come.

Do You Get the Blockchain?

This reminds me of the mid-1990s at business school. Netscape had just been released. Each day, another friend would stop me outside class, hands waving.

“Do you get it? Do you get it?! Do you get… the World Wide Web?”

“What web?”

They would look at me with wild eyes and howl, “You don’t get it!” and run off down the hall.

Once we all got it, the pundits predicted the Web would change everything — computing, entrepreneurship, blue- and white-collar jobs, the financial markets, the US economy, global relations and human society. That caused a massive bubble and when it collapsed massive pain.

Notice that a collapse did not prove the pundits wrong. The Web really did change industries, markets, and human society.

Nothing since has felt quite the same as “the Web” until this year.

Only now am I meeting people with THAT unique look in their eye.

“Do you get it? Do you get it?! Do you get… the blockchain?”

Hmm. Time to pay close attention.

A Blockchain is a Public Database That Nobody Controls

Want to “get” the blockchain? Start with a comparison.

When you buy a house, the fact is recorded in your local Registry of Deeds. It’s on a piece of paper.

You rely on the Town Registrar to ensure that no one walks in and changes the deed to another name. You trust the government. The person buying your house also trusts the government when they accept the deed. Then they pay you cash for the house.

In many countries though, you can not rely on the government.

Perhaps your town clerk will demand you slip him two cartons of cigarettes before he can “find” the deed.

Or perhaps the State decides to put a parking lot in your yard, and it just pockets the deed and sends a bulldozer.

Not much you can do.

Maybe someday a product manager at Google will decide to charge you for access. Or perhaps they will analyze your home videos to learn how to manipulate you with more persuasive ads.

Increasingly our lives are intertwined with the fates of a few tech giants — so-called GAFA (Google, Amazon, Facebook, Apple) and BAT (Baidu, Alibaba, Tencent). They are consolidating the Internet.

Not much you can do.

So today, we often rely on an Authority, which means a government or a Google, who tells us information that we regard as the Truth.

The problem is that Authorities are self-interested. The more we rely on them, the more powerful they get. That power corrupts.

While free elections and free markets are a partial solution, they are not always sufficient.

What matters about Blockchain is that it confirms Truth WITHOUT needing an Authority.

In computer terms, a blockchain is “a database that is visible to the public.” It is “distributed” which means freely published and widely copied. Unlike a database hosted by one company or one government, this database is synchronized across many computers in parallel.

Everyone can see every change, going back in time “in a chain” that reaches to the day when the database was first started.

(It’s more private than it sounds, because you can encrypt the data that you store in the blockchain. Your encrypted file is still viewable to all though.)

With Bitcoin, the data is checked for tampering across all the computers every ten minutes. If there is any discrepancy, the computers hold a vote, and majority rules. So a bad guy who wants to change the data would have to hack more than half the computers in the network. And because each block of data also contains a hash summary of all prior data, the hacker would have to rewrite MANY blocks. To do that much hacking in less than ten minutes is impossible by any known means.

That is why you can trust that information you read on the blockchain has not been changed. As Professor Silvio Micali at MIT says, “It is written in the sky for all to see.”

Admittedly, storing data in a distributed way is slower and more expensive than storing it in a single computer owned by an Authority you trust, like your bank. Writing in the sky is more work than writing in a diary.

Blockchain is the right choice when you do not trust others to keep accurate records.

Thus, Bitcoin has been more quickly adopted by citizens living under weak or corrupt or authoritarian regimes. It is also good for exchanging payments among parties who do not trust each other.

Some first uses, like collecting payments for ransomware, have been notorious. As we know from Clay Christensen’s Innovator’s Dilemma, it is often a small group of dissatisfied users who adopt new technologies and generate the demand that leads to eventual mainstream capabilities.

This aspect of blockchain can fight fraud. Keep an eye on supply chain, insurance, identity theft, and medical billing.

A Blockchain is also a Printing Press

The data you put in the blockchain does not have to be about payments. It could be an open letter.

It could be an encrypted letter. Perhaps you only send the key to your friends.

A blockchain is a printing press that cannot be censored.

Keep an eye on media and journalism. A company making waves in this space is LBRY (a Pillar seed investment). LBRY is a blockchain marketplace for digital content, particularly video clips and movies. A LBRY token is like a movie ticket. The difference is that the fee goes straight to content hosts and producers, bypassing the fees that an iTunes or Youtube would take.

If a blockchain version of Facebook or LinkedIn were to emerge, ads and subscriptions could be replaced by a token model. At a time of fake news worries, blockchain journalism could allow stories could be traced back to authors and quoted sources in a verifiable way.

A Blockchain is also a Legal System

Now enter Ethereum. The idea here is that the data you store on a blockchain could be computer code. The code could represent a “smart contract.” Let’s say two parties who do not trust each other agree “if the price of corn goes over $15 tomorrow, I will pay you $1 million otherwise you pay me $1 million.” The computers in the Ethereum network can hold the funds, wait a day, check the price, and make the money transfer as appropriate.

The makers of Ethereum describe it as a system for writing “distributed application software”. Contract logic is written in a modified version of Python, JavaScript, Go or Lisp. An optional client runs an Ethereum browser called Mist. The server side runs the Ethereum virtual machine (EVM). Ethereum is distributed, meaning copies are run on many computers at the same time, and each step of the code is open for all to see and compare. That makes it auditable and trustable.

Some imagine Ethereum will become a giant cloud computer, like a peer-to-peer AWS. That is a stretch, because Ethereum needs a lot more overhead than AWS. The real significance of Ethereum is to allow for fair and transparent decisions.

To extend the analogy on government functions, Ethereum is a way to have an impartial legal system without trusting any central Authority.

Today, if someone owes you money, you can sue for payment only if you trust your country’s judges. Instead, if you write the deal into code and publish it to the Ethereum blockchain, everyone can see who is supposed to pay. And since currency is digital, the payment occurs automatically as the code runs. No hold-up or diversion of money, and no need for lawyers.

Now we are starting to “get” the blockchain.

It allows citizens around the world to ensure Truth, Freedom and Justice for themselves. Disagreements of fact are resolved democratically by a majority vote, at a transparency, frequency and scale that would be extremely difficult to corrupt.

Blockchain thus bypasses regulation and censorship. It is a tool that transcends government and corporate authority.

For business implications, keep an eye on finance, property and commerce.

A Blockchain is also an Economy

Let’s consider a final aspect of the blockchain: cryptocurrency.

For the blockchain to become distributed, many computers must store data. The more the better.

This is encouraged by providing a shared digital currency.

People who want to store data on the Bitcoin blockchain use their local currency to buy a Bitcoin, the same way you can use dollars to buy yen or rubles. Then they pay with the Bitcoin to have their data recorded by the network. The Bitcoin goes to the companies who maintain all those copies of data. The way the pie is split is defined in a protocol that everyone can see, and all the financial payments are transparent.

After the companies operating the network receive their Bitcoins, they can sell them for local currency to the next person who wants to store data.

As the database grows in popularity, more people want to store data. The Bitcoin currency rises in value. The companies operating the network earn more and more in terms of dollars.

Bitcoin never suffers from inflation, because there is no Authority who can borrow against it or who can print more currency. Bitcoin is capped and will never have more than 21 million coins. Blockchain thus replaces the central bank. Everyone can trust the bitcoin currency, without trusting each other.

That is key. Because all of the people and companies supporting a blockchain share the same currency and are tied together by the same protocol that ensures they are paid, they have a reason to cooperate, and they have a shared financial future at stake, EVEN though they do not share stock ownership, or have any formal affiliation. They may never even meet each other.

Blockchains create network effects on steroids. Instead of a two-sided marketplace with one lucky winning company in the middle extracting tolls, we have a flywheel with many companies acting as the petals, spinning faster and faster, and the currency conversion rate spirals upwards.

This plays directly into the gig economy and consumer services.

A Blockchain is also a New Organizational Form

Today we organize people into shared risk-taking ventures using corporations. Each corporation has a governance structure. The CEO is in control. The shareholders vote on whether to replace the CEO. An outside company audits the books to make sure the CEO is not stealing.

What the combination of cryptocurrency and blockchain enable is a NEW way of organizing people. Instead of one big company, we have a collaboration of individuals and smaller companies meshed together by a common currency. The whole ecosystem across different entities is pulled together by a common desire to increase the value of the currency.

It’s as if you gave stock options not just your employees, but also to your suppliers, and producers, and distributors up and down the whole supply chain. And as if they gave their stock options to you. No central authority organizes; no one company is in a position to extract value; all benefit.

Instead of Apple charging 30% fees to host apps in a store, the apps go straight to customers. Instead of Uber charging a 20% mark-up on drivers, drivers can work directly with riders. And all of their transaction and ratings and reputation can be stored openly and anyone can audit them. The result is a fairer, more level distribution of profits than winner-take-all.

What enables the new organizational form is (1) an objective and consistent formula for sharing the pie as set by a protocol; and (2) trustable records, which is a result of the blockchain — the ultimate in open book management; and (3) a trustable currency that can store value permanently.

With easier trust and cooperation, businesses can collectively operate at scale across corporate boundaries. That means individual businesses can be smaller and more cellular (think of APIs and containers). The separation into smaller autonomous units further promotes trustability, since more different network participants share in voting.

Blockchains transcend corporations, creating intelligent ecosystems that span across them.

One thought here is that these ecosystems also easily can span countries. Keep an eye on cross-border trade.

This Changes Everything

In summary the blockchain is:

• A public database that nobody controls
• A printing press that resists censorship
• A peer-to-peer legal system
• An economic model that does not require a central bank
• A new way of organizing and aligning people

At the core, blockchain is about rethinking governance. That has both political and tech importance.

In the political realm, blockchain believers feel we live in a time of winner-take-all and rising inequality. Our bureaucracies expand. The global trend is toward authoritarianism and corruption. We see rising oligarchy. We see gerrymandering and legislative capture.

Governance needs reform. Blockchain can be a transformative tool.

In the tech world, the oceans are increasingly ruled by giant sharks who snap up their smaller prey.

With blockchain, we will see instead large schools of small fish, collaborating with trust, sharing code via open-source to move faster, and making quick, local customizations. They will be harnessed into a shared interest by a cryptocurrency. They will be leaner and more agile than the giants.

If you are a tech giant, that prediction sounds largely incredible. If you are an entrepreneur, it sounds incredibly large.

Today’s large governments and nation-states are the whales in this analogy. Tomorrow we will see small groups of like-minded individuals, sharing any ideology you might imagine, collaborating with trust through a blockchain, sharing information and making quick, local decisions. They will be harnessed into a shared financial interest by a cryptocurrency.

How long until these global, distributed groups feel a depth of commitment to their blockchain community that is stronger than the ties they feel to their country? Think of how some inside Britain wish they could remain with the EU. Can governments tax these intangible, partially offshore groups? Will people of the future want legal identification issued by their blockchains instead of their countries?

In America, the replacement of government authority by blockchains holds little attraction. It may greatly attract the people who live under less reliable governments in foreign countries.

And We Are Just Beginning

All of the protocols for blockchain and Ethereum are written in open source code and published. Anyone can download this code and set up their own blockchain. There is complete transparency with minimal barrier to entry.

Because the code is open-source, it can be extended and modified and tested massively and in parallel by many people at the same time, speeding up the rate of innovation and the ease of customization.

In summary, blockchains are a quintessentially democratic counter-reaction to concentration of power. They are of the people (the data), by the people (the contracts), and for the people (the currency).

They are tools for Truth, Freedom and Justice that can upend corrupt giants.

Blockchains can reshuffle some of our most complex, interconnected markets.

And we are just starting to figure out what else they can do.

So ask the next person you see.

Do you get…the blockchain?