Confused about blockchain? You should be.May 2017
Blockchain’s promise is incredibly powerful but today it is littered with contradictions.
Original Article written for Wired.co.uk
Blockchain, at least in the UK, is ‘past peak’ in the Gartner Hype Cycle. Either you’re bored of hearing about its miraculous powers or you’re likely lost and confused. If you aren’t, you should be.
The blockchain ecosystem is weirdly wonderful. Filled to the brim with idealists who want to change the world and get very rich, quick while, ideally, paying no taxes in the process. The promise of bitcoin was a new global financial system free from the influence of any state. Now, holding more than $21 billion in value, everyone from Silicon Valley VCs to the Chinese middle-class have a stake. But still, nowhere is it widely used as a legal currency of note. Japan may change this, but its wealth distribution almost identically mirrors the 99 per cent to 1 per cent gross imbalance it was promised to replace.
In fact, far from freeing people from the oppression of the state, blockchains perversely promise the perfect tool for a fully auditable, tax compliant, cashless society. Similarly, the belief it is an anonymous digital cash has quickly vanished and we are now seeing a large number of analytics companies, set-up specifically to work with law enforcement agencies, to police this new parallel financial system.
The few VCs brave enough to have invested early have seen their startups fail to make returns unless they have accumulated bitcoin in some way. Its most powerful innovation has, instead, been the creation of digital scarcity, and its importance cannot be underestimated. Today this has been applied solely as a digital gold in turbulent economic times and this fundamental misunderstanding has tripped up some of the world’s smartest VCs.
“Far from freeing people from the oppression of the state, blockchains perversely promise the perfect tool for a fully auditable, tax compliant, cashless society”
Most blockchain startups are still a long way from the mainstream; only really serving a niche of early crypto-enthusiasts or other blockchain startups that require a new decentralised stack to deliver their own promise. Most have settled to build enterprise consultancies for B2B clients rather than disrupting markets. Their energies are focused on fixing legacy systems and finding margin gains for incumbents for the financial services companies many hoped would be disintermediated forever.
The few exits that have happened, such as ChangeTip to AirBnB, or Mediachain to Spotify, have been acquihires selling out early because they realised they had built a feature set, not a high-growth standalone business. Expect more of that to come.
Those incumbents who pioneered their own internal experimentation, and were open minded about public ledgers, have found that when trying to do anything at scale, things just don’t work and the economics are, for now, often cost prohibitive. The fact Bitfury, one of the world’s largest bitcoin miners has built a private ledger which simply hashes its output on the Bitcoin blockchain shows the limitations. The same rings true for Ethereum. Worse still, these limitations look likely to drive the Bitcoin community to breaking point, otherwise known as a hard fork, as has already happened in Ethereum. These public ledgers with their model of crypto-equity have some of the most powerful network effects we have ever seen, but they also have a fractious fragile quality.
For the first time, there is a way for open-source communities to self-finance through Initial Coin Offerings (ICOs). Before this has even started, some VCs have decided to experiment with hedge fund-like models to trade tokens as a commodity only they are able to do so, in a dark pool by design. Given the comparatively small market size, as a large holder, it will be much easier to move the price up or down. We are told we just need to trust they won’t.
The idea of liquidity is incredibly appealing to speculators but not so great for the startups who are naively choosing to ‘go public’ before they have anything close to product-market fit. Those, who now, rather than being backed by supportive angels, have thousands of day traders who can and will short them at the first sign of trouble.
We are told Web 3.0 brings an era of ‘fat protocols’. In Web 2.0,we saw centralised applications suck up most of the value in the form of companies like Facebook, Uber and AirBnB. But this time the hope is the majority of value resides in the democratically owned protocol layer. The only way you can profit from this is by holding their underlying tokens. Many are giddy with the idea we will do away with rent seeking, centralised, monopolies, but when people begin to apply AI to these new open datasets they can make their smart contracts smarter than yours. I believe this could lead to a winner takes all dominance seen in Web 2.0 companies like Google.
“Worse still, these limitations look likely to drive the Bitcoin community to breaking point, otherwise known as a hard fork, as has already happened in Ethereum”
At my fund, after four years in the space and having spoken with more than 1,200 blockchain startups, we have come to the conclusion most of this open-source infrastructure is best thought of as purely foundational. Instead, it’s the combinations of blockchain and AI that are most interesting commercially because they offer moats.
Most interestingly for me, the blockchain enables other tech trends like the Internet of Things, 3D printing and mixed reality to scale, and do so securely. We call this blockchain +. Think of 3D printing: today, no creator wants their digital asset anywhere near the internet, CAD files are passed around on USBs to avoid their being copied and then printed innumerable times. To physically transport the design file totally defeats the point of being able to produce at the edge. Yes, you can share, but doing this on a centralised system has many vulnerabilities and who owns it?
Blockchain-like technology can secure the CAD file to be as unique as a bitcoinand protect its ownership on a sharded and cryptographically secure ledger. Printers become wallets with read-only access to the file, on a per-print basis, using an open-source software install. All transactions are fully auditable with proceeds from royalties automatically distributed, instantly via smart contracts, to any number of participants including the tax man. To involve a network of so many stakeholders requiring automated and secure payments it must be decentralised. All of a sudden you have secure 3D printing.
This story plays out in similar ways across IoT, AI, mixed reality and autonomous robotics. Where it gets really interesting is if they all leverage this new web infrastructure, it could provide a common operating system whereby they begin to converge, combine and accelerate one another. We call this ‘convergence’.
So if I have sounded negative, I’m not. I’m now more bullish than ever. Blockchain-like technology brings new and powerful characteristics to Web 3.0. It enables greater levels of decentralisation, automation and governance; it fixes the digital scarcity Web 2.0 broke. But today blockchain is riddled with contradictions and misunderstandings. Most of its problems are very fixable, if you want to fix them, and this just requires pragmatism. Sadly, this is what has been, at least until now, in short supply.