“It’s hard to make predictions, especially about the future.”
But of course we can always make fairly educated guesses.
Thing is: Bitcoin is currently on a crossroads. At stake is the mother of all crypto currencies, the mighty Bitcoin. Due to its size and value, the Bitcoin network had to become a fairly slow mover. Changes take ages. But it’s becoming obvious that the status quo is not really sustainable.
The blocksize war (rather big name for a rather ludicrous challenge) can be seen as a forerunner of bigger things to come. It’s kind of obvious that the Proof of Work mechanism is working really nice, thank you. Unfortunately it tends to be a rather power-hungry (and therefore expensive) way to deliver seigniorage and validating transactions. Newer crypto contenders look into different models, like Proof of Stake, which of course have their very own challenges, but need way less power and are therefore much cheaper in operations.
To put things into perspective: about a year ago, I did a ballpark calculation onPower Hungry Crypto Coins. Back then, the equivalent of about 0.13 nuclear power plants was needed to run the mining infrastructure. Not much, one might say, to power a global currency.
But here we have the next problem: Bitcoin as a currency for everyday transactions just hasn’t taken off. As a currency, it seems a bit of a very clever solution in search for a problem. On the other hand, there are a couple of problems lying around, which would happily latch on to a blockchain based solution – well, if some technicalities would be in place. Hence all the initiatives around Bitcoin 2.0 and VC and other monies pouring into the space, efforts like sidechains, the increase of the blocksize or straight forward competitors like Ethereum.
So let’s come back to the question. The blocksize war is a mere skirmish – which could end up in a civil war. Bitcoin’s technical strength, the power of its network, is at the same time its most prominent weakness. Fiddling with technical specifications means a handful of software engineers tweaking a distributed infrastructure worth several billion Dollars. Some large changes, like the blocksize decision, need a hard fork of the blockchain.
From a miner’s perspective, forks that lower the ROI are always scary. Your margins are as volatile as the exchange value. But your operating cost, due to the energy consumption, are always to be paid in Dollars, EUR or Yuan.
And if the ultimate fork would happen, the switch from PoW to PoS, this would leave you with some server racks filled up with expensive scrap metal. Of curse, on the other hand: if competing currencies or models make Bitcoin obsolete, there’s nothing left to mine for you as well.
As a small Bitcoin holder you can just watch carefully. And if you want to treat your coins as an investment, then do as with any investment: don’t put all your eggs in one basket.
This year, I was sitting with a rather baffling question. What if there is a kind of successful product in the market, you do lots of research and such. But in the end, you still ask yourself: so what are those users really doing there? You can always ask them nicely. But you know, there’s this difference between stated preferences and reality. Ask people, and they read the NY Times and watch CNN. See the data, and you won’t believe what happens next.
Right. Stated preferences mostly reveals more about the guy asking than what’s really going on. People try to keep up appearances. That’s the human condition. If you’re not a registered sociopath or a saint or another type of fringe personality.
#JTBD to the rescue
Guess what. There’s a really nice solution out there. Because the problem of not knowing what your customers really do and want is a fairly common one. Clayton Christensen, professor at the Harvard Business School, came up with the concept in the 90ies.
Jobs To Be Done refers to the core concept behind: people don’t buy “a product”. They “hire” a product to get a “job” done. Have a look at those four guys in a subway car. The “job” is always the same: How to not get bored on a subway ride. But three totally different products got “hired”. A book, a smartphone, a magazine (we don’t know about the gentleman to our left).
But that’s not the hard part. The hard part is finding out what the job really is people hire your product for. Think about a newspaper publishers. A weekend issue of the NY Times is a nice thing to stack up in your spacious living room. But unfolding it on the A-train needs lots of manual dexterity, yogi-like body mastery and a certain disregard for the people sitting next to you. It took decades to come up with newspapers sized for subway rides (and no, the NY Times isn’t one of them).
The beauty of Christensen’s concept is its simplicity:
“The fact that you’re 18 to 35 years old with a college degree does not cause you to buy a product,” Christensen says. “It may be correlated with the decision, but it doesn’t cause it. We developed this idea because we wanted to understand what causes us to buy a product, not what’s correlated with it. We realized that the causal mechanism behind a purchase is, ‘Oh, I’ve got a job to be done.’ And it turns out that it’s really effective in allowing a company to build products that people want to buy.”
You want more? Watch Christensen a bit more in detail.
To get to the bottom of the jobs question, you start with interviews. No surprise. What you want is an xray of your customers mindset when he’s using your product, when he decided to buy, and finding out what is really the job he is solving by using it. So you better start talking, and forget all your assumptions (even if they turn out right).
The interview style is pretty interesting: laid back and trying not to be leading you walk your customers along a scripted timeline. I liked it. Seems like my former journalistic life not only lead to excessive noseyness (an occupational hazard). But then, I had some help (thanks, Tor) and many helpful resources. The Jobs be Done Handbook might look rather pricey for being a self-published booklet of just a handful of pages and really hideous typesetting. But hey, it get’s its job done.
More of a challenge: most scripts, guides to scripts and examples of interviews out there are geared towards real products, bricks and mortar style. Tangible goods. Which makes it a bit hard to follow advice like “build around the Point of Sales“. As the PoS will be most likely your customer’s living room.
But hey, I got it to work. It’s just that the how part might have to become another post.
Lately, at one of our Bitcoin Startup Berlin meetups, I did a short talk about Proof of WTF: Proof of Work, Proof of Stake, Proof of Burn, Proof of Resource are a core ingredient of crypto currency technologies. And as I’m not a software architect or programmer or anything close, I will not bore you with disseminating too much semi-knowledge. Let’s just leave it like this: if you want to validate a transaction (and for the purpose of seigniorage), Bitcoin-alike crypto currencies need a network of computers agreeing upon a Proof of Something. If you want to know more, try the Proof of-links above (or ask me for the presentation, which is unfortunately riddled with too many copyrighted images to share freely anywhere).
But back to work, literally. Bitcoin, being somewhat the genetic father of practically all p2p crypto currencies on the planet, is made possible by the proof of work: a bunch of computers solving a software riddle of increasing complexity. Nakamoto’s solution was brilliant, as a proof of concept. Unfortunately, it does have some side effects. In its current state, Bitcoin has to rely on a huge network of professional miners to validate transactions, which spin out new coins as well.
At the Berlin Inside Bitcoin conference, somebody from the audience asked two of those miners on the stage, how a Bitcoin born in 2014 would look like. Would it still use a Proof of Work mechanism? Or would another solution like Proof of Stake be preferable? Now guess the answer of the guys making a living from running a network of PoW-machines. Wrong. Their statement was pretty clear: Proof of Work works, but it comes at a price. Proof of Stake or other concepts would be more future-proof.
In physics, power is the rate of doing work. So you might rightly infer that Bitcoin’s Proof of Work based system, with its increasing complexities, might need more and more power. You’re right.
If you follow the developments of Bitcoin mining, you will have noticed some strange developments.
In the beginning, you could mine some coins with your desktop hardware, on your CPU (while browsing the web and fiddling around with a spreadsheet). Those days are long gone.
Next step: try running the mining program on your GPU, the graphical subsystem of your PC. This worked nicely for quite a while. But even high powered multi boards GPU monsters couldn’t keep up with the demanding network.
So, since quite some time, we’re into ASIC mining: single purpose computing units, which are just able to handle a single task: Bitcoin mining. And, maybe, heat your apartment. Literally.
As there are too many myths and not enough facts around, I tried some very simple calculations. To be honest, the results are something between totally scary and kind of reassuring.
What I did was the following:
Blockchain.info is publishing some stats on a regular base: http://blockchain.info/stats. They are all nice and interesting, but the only thing we really need here is the last number on the page, the hash rate.
Currently, as of 2014-04-09, the Bitcoin network is running at 46,848,838.03 GH/s
Now, let’s have a look at mining hardware. Here we go, the mining hardware comparison table. https://en.bitcoin.it/wiki/Mining_hardware_comparison
A brave spreadsheet soldier would normalize all those number. I’m not, so I just did a sloppy calculation, coming to the following:
CPU mining is running on average at approximately 6.67 KW/GH
GPU mining needs round about 0.5 KW/GH
totally new ASICs hum smoothly at 1 W/GH
Now, according to the EIA, a typical US nuclear power plant generates 11,800,000,000 MW/h per year.
This translates into the following:
running the current Bitcoin network on CPU mining hardware would need 83 fully loaded nuclear power plants
with GPU mining, we still would need six extra plants
Could be better, could be worse. But what are the implications? One line of thinking goes like this: the Bitcoin network is like totally useful. Spending some energy on something totally useful should not be a big deal. Eat that, tree hugger! (OK, skip the last part.)
But my besides hurting my bleeding eco-friendly heart, the power hunger of Proof of Work has some other side effects as well. The armament race for faster, less power-hungry mining hardware definitely leads to a centralization of a core part of the network. Which, in the long run, makes the network less secure: it becomes more centralized, 51% attacks become more likely.
At the same time, the price for running the network is currently mostly paid by seigniorage, the mining of new coins. But there will be a certain point in the future, where the networks has to rely more upon transaction fees. The more power-hungry the network, the higher the cost of transactions. Because, even if you think climate change is made up by black helicopter flying aliens from a socialist parallel universe, you still have to somehow pay your utility bills.
So, I guess: sooner or later Bitcoin will have to switch the base technology. Because Proof of Work works well. But Proof of Stake seems like a more sustainable solution.
I don’t have a problem with anybody receiving some outrageous monies for his work. 19 billion USD might seem a bit over the top for a mom and pop pseudo-SMS operator. But it’s Mark Elliot Zuckerberg billions, so I don’t care if he spends them on platinum popsicles or a piece of heavily used software.
Unfortunately, the deal points to a pattern. That’s what Robert Reich is pointing out, first on his Tumblr (sold for 1.1 bn USD), then at Salon. It might be an occupational hazard that the former secretary of labor under President Bill Clinton is keeping an eye on he job market. But his diagnosis is pretty spot on:
The winners here are truly big winners. WhatsApp’s fifty-five employees are now enormously rich. Its two founders are now billionaires. And the partners of the venture capital firm that financed it have also reaped a fortune.
And the rest of us? We’re winners in the sense that we have an even more efficient way to connect with each other.
But we’re not getting more jobs.
It’s the core problem of our networked digital economy (just ask Jaron Lanier). And it’s a reiteration of the pitfalls of productivity, which lead Henry Ford to his famous statement “cars don’t buy cars”.
Back then, the problem was a bit more in the open. Pay your workers well, and the humming economy will pay you back with interest.
But, as Reich states: our new economies have a different problem. It’s not that the WhatsApp-workers are impoverished human beings, wrought out in the treadmills of late stage capitalism.
The problem is: they’re hardly needed anymore. Look at a traditional telco like Sprint Nextel. Their market cap is just 50% higher. Now look at the employment numbers:
– WhatsApp: 55
– Sprint Nextel: 79,000
That’s right. Merge the app team into the telco, and it disappears as a mere rounding error.
Can productivity be the problem? Hm. In the first electrified trains, a mandatory stoker had to be on the train. This approach may have solved one family’s bread and butter problem, but reeks of institutionalized madness.
So maybe it’s more about the distribution of the productivity gains? Let’s have a look at the wealth creators of the last years: Facebook, Twitter, AirBnB, Uber, Soundcloud, and now, WhatsApp. Great services all of them, highly successful as well. I prefer (almost) any AirBnB accommodation over a run of the mill business hotel. Me likes Twitter. Facebook. You name it.
All those services share one thing: they are highly centralized. In terms of the service, and in terms of the wealth they created. I tweet and become a participating member of the attention economy. But the intrinsic value of the tweet is absorbed somewhere else. I rent out my place. But the listing service receives a huge percentage.
In terms of the value distribution, the chain looks like that
founders and early investors
later stage investors
service providers to the company
employees on the payroll
eventually: outsourced service providers (Uber drivers, AirBnB hosts, …)
You may rent out to peers. But the value distribution is definitely not peer to peer.
Producing value as in content usually is valued as zilch. Look at Medium as a new publishing model. All words are meant to be free. Not as in speech. But as in freebie.
Don’t get me wrong. Founders and early investors should get a big chunk. They’re taking an oversized risk (I know what I’m talking about). But it might be the right time to look at different models of value creation and distribution.
As I’ve been annoying everybody in the last couple of months with my harping on crypto currencies, you might know what’s coming. Yes. Let’s talk about crypto currencies.
Crypto currencies may look a bit weird. But they have some serious implications.
Just try this thought game:
– A crypto coin like Bitcoin is a token of ownership.
– Ownership always comes with increased interest (as nicely described in the endowment effect).
– Ownership of a crypto coin makes you a stakeholder in a crypto economy.
Now look at this: crypto coins like Bitcoin are basically programmable money. You can build economic entities which practically run themselves (like WhatsApp). But those new entities can share the created financial values between all stakeholders.
How can this look alike? David Johnston’s paper on Decentralized Applications is taking a very good lead here. One of his examples would be a Meshcoin: a crypto system to run a decentralized network of meshed WiFi hubs, which is not based on donations or the “hey, we could sell some ads”-model, but offers economic incentives to run and mesh up your hub with many others. Which could look like a FON on steroids.
Because, don’t forget: routers don’t buy routers and jobless Tweeters do not need any ads.
A tl;dr might go like this: the crypto currency express is leaving now. Please take your seat and learn your magic – or stay a muggle.
No, really. As Arthur C. Clarke wrote in his third law of prediction: Any sufficiently advanced technology is indistinguishable from magic. And if you follow the arguments of two authors of the study, you will probably want to board the train to a virtual Hogwarts ASAP.
The authors know pretty well what they are talking about: Sander Duivestein is a software engineer and works at VINT, the trendwatching think tank of Sogeti (which is a subsidiary of french IT giant Cap Gemini S.A.). His co-author Patrick Savalle is the founder and technical director of Mobbr, a brand new payment platform for network economics, based in the Netherlands.
They start with a nice intro why the current trend of economist debunking Bitcoin is not Hogwarts, but hogwash. Like Alan Greenspan asking for its intrinsic value, just seeing a bubble. As his contributions to the Great Recession are quite undisputed, the verdict of the co-creator of the largest financial bubble of the history of finance could have some weight.
But Duivestein and Savalle treat the aging economists quite nicely (There is a lot of confusion about bitcoin.) They could have quoted Clarke’s first law. When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
But they do explain to everybody, what the real, technological impact is.
Thanks to the Bitcoin protocol (crucially distinct from bitcoin, the currency it underlies), for the first time in history it is possible to transfer property rights (such as shares, certificates, digital money, etc.) in a fast and transparent way, which cannot be forged.
Moreover, these transactions can take place without the involvement of a trusted intermediary such as a government, notary, or bank. Anyone who fully appreciates these attributes will immediately acknowledge the tremendous value of Bitcoin.
It’s the platform, stupid! And this platform can have some serious implications for anybody’s way of doing business. Just have a look at the all the oversized successes of the Internet economy. What do Twitter, Facebook, Google, Yahoo have in common? They are media businesses. Their business model is advertising, meaning: they have found no intrinsic way to make users want to pay for the services they render. More than one eight of the world population uses Facebook quite extensively. But they need to extract their value exclusively from third parties.
Or look at the posterboys of the sharing economy, like AirBnB, Uber, Lyft. They are all highly centralized businesses, which outsource the grunt work to some local drone (who might even get sued for making a couple of Dollars or Euros on the side). I love AirBnB. But as a company, they’re the 1% of the digital Uberclass.
Bitcoin pioneers a different model: everyone becomes a stake- and shareholder in this new networked economy.
Bitcoin is key to the success of the Collaborative Economy. Bitcoin enables a frictionless and transparent way of sharing ideas, media, products, services and technology between people without the interference of corporations and governments.
It’s ideas like the DAC (Digital Autonomous Corporation, or Community), the Decentralized Application (DA), which are driving the process. Sometimes a bit wild-eyed. But hey, Bitcoin shows a valid path: it’s a completely bootstrapped economy, still in beta and its infancy, with a market cap of 10 bn USD (not counting the capitalizations of the startups and businesses – just the money rolling around in the system).
In a system like this, ownership rights can flow through the Internet like ‘normal’ content (from e-mail to video streaming) already does. And no one can dispute or counterfeit who has ownership. It is safe, transparent, and mathematically secure.
What we see is an emerging commercial operating system, on top of the global communications layer the Internet already offers.
What we enter, is a totally unchartered area. At the Inside Bitcoins-conference in Berlin, even the crypto-savvy lawyers talking about “Emerging Issues in Regulatory Compliance and Law Enforcement Efforts” were a bit out-of-bounds, when asked about the legal ramifications of DACs and DAs. Think about an autonomous soda machine and …
… who exactly is legally and economically responsible (say, if someone were to get sick from a can of soda from one of these machines, for example).
So why touch crazy stuff like this anyway? Duivestein and Savalle have a historic answer:
In 1937 Ronald Coase published a groundbreaking article, The Nature of the Firm. In it he posed a very simple question: “Why do firms exist?”.
In his research he came up with the concept of transaction costs to explain the nature and limits of firms. Companies exist primarily because the underlying coordination mechanisms of the market aren’t perfect.
According to Mitt Romney, corporations are people (which sounds nicer than saying corporations are oversized homunculi). But the basic idea is already nicely embodied (sic!) in the English term “incorporating”: you give a transactional structure a legal body (sic!). Coase gave the answer to the nowadays mostly unasked question why we are doing that. Yes, deflecting liabilities can play a role here. But at its core it’s all about transaction costs.
Of course, the crypto currency based democratization of money and finance can be a scary thing as well.
Like any powerful technology, Bitcoin can either be seen as a Pandora’s box, or as a step towards Utopia. Bitcoin just obeys the First Law of Technology:“Technology is neither good nor bad; nor is it neutral”. Asking yourself whether Bitcoin will fail is like questioning yourself whether technology can be “un-invented”.
If you accept that there’s magic, you may ignore it at your own peril. Even if you hide all evidence in a tiny cabinet under your stair case, you might still end up as a pigtailed Muggle.
It is much better to experiment and innovate with this new platform.
And not just that. Becoming an active participant means you can shape this really new economy. Because, to stay in the metaphor: The “You-Know-Who” and “He-Who-Must-Not-Be-Named” will there be present as well, not just young Harry and his merry band of friends.
So, let’s end with Clarke, again, quoting his 2nd law of prediction. Please don’t forget: he was a prediction pro. In 1945, as a Sci Fi writer, he proposed the rather farfetched idea of putting communication satellites into a geostationary orbit, now sometimes nicknamed the Clarke Orbit. Farfetched, because it took another 12 years until the Russians launched Sputnik (first satellite ever) and another seven years for NASA to launch Syncom, the first geostationary communications satellite.
So, what is Clarke’s final advice:
The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
Bitcoin raised this bar already to quite some extent.
The known world is divided into three parts: if you say Fiat,
30% (estimate) will describe something like this red thing here: four wheels, metal, internal combustion engine. Italian. Depending, of course, a bit in which part of the world you live. In Europe, you’ll get >99.9%, in South-Korea probably <1%.
0.5% will talk about evil bankers issuing fiat currencies.
the rest will just say: huh? Whatever.
Brands are about relationship. When launching their cuddly 500, Fiat (the Italians), had to put a little bit more effort into that. In the US, just 8 percent had any brand recognition at all. Fiat did some nice things: they hired JayLo, had a nice viral video making inroads, and pushed themselves up to 30%. Still room to grow, but a nice base.
If you now think, that a brand is something you can create in a lab, or by hiring a branding agency, you are wrong. Brands are the collective public image of who or what you are, in the eyes of the consumer. You can try to nudge their perception into a certain direction (hiring Roseanne instead of JayLo might not have been that kind of perfect fit for the Italian accessoire-car for the generation Desperate Housewife). But that’s just about it. Your core values will still be represented in your product, you service quality, your tonalities.
Brands are about trust. And that’s were the importance for Bitcoin and all other crypto currencies begins. As crypto currencies are backed solely by trust, supply and demand, and a mutual understanding of the economic value this produces.
Growing the whole ecosystem from 0 to 10 bn USD was already an amazing feat. But where will the future growth will come from? A network needs a reason to join. Get rich quick A.K.A. speculation on growth works only, if the underlying message comes across to a growing user base (which finally might make the step from investment to every day use). 0 10 bn is fantastic. But 10 bn USD is just about doubling the M2 monetary supply of West Samoa. So there’s some need for growth, if one wants to become a global currency.
Now, how does Bitcoinese currently sound? I’m not talking about the misinformed media misconception of yeah sure, just good for buying drugs online, tulip bubble, yadda yadda. I’m talking about how the community talks itself. Brand-linguism (if such a crazy thing would exist) would probably dissect the language as having heavy influences of survivalist, fortified with some geekspeak, with a side serving of free market lingo.
The doges of Venice would have been proud to become a part of that. But as far as I know, crypto currencies are not about creating another financial playground for the 1%.
Now, please watch this video, about another doge:
Yes, it’s a stupid one trick pony taking over popular meme and exploiting. And, no, this is NOT Bitcoin 2.0 or the future of monetary transactions and whatever else is in the DNA of crypto currencies.
But reddit, as always representing the virtual finger on the geeky pulse of the times, shows something happening here.
Many large transnational corporations have turnovers bigger than many national economies. They have to deal with any currency they encounter (as long as the market it represents is big enough). So sooner or later some large entity might add Bitcoin to its already existing Forex headaches.
For retailers, the incentive to accept Bitcoin should be fairly huge: reducing the acceptance fees for a sale from let’s say 1.5 to 0.5 percent would almost double the margin of many a A&P, Walmart, Carrefour or BestBuy. This won’t happen too soon on a large-scale, as the investments involved would be quite sizeable and the whole Bitcoin economy is still too small and fringy to make a real bottom line impact.
The really fascinating use cases might even be a bit more spectacular. Running and controlling a large corporation is a highly complex and costly affair. They have to operate under Lenin’s advice: trust is good, control is better. By solving the Byzantine General Problem (how to trust the inherently untrustworthy), Bitcoin (and other crypto currencies) were able to build currencies without needing a centralized trust authority like a central bank at its core.
If you now apply a trustless system with its encrypted public ledgers to the operations of a large corporation (think: crypto SAP), the effect should be rather scary. Even if you just start by converting your internal financial system from multicurrency into GEcoins or DaimlerCoins or IBMcoins, wth each of them possibly representing a larger market cap then the “meager” 10 billion USD Bitcoin currently represents.
Seems like I almost missed the pink elephant in the room. The industry which could benefit the earliest the most from Bitcoin is of course the industry which currently has to feel threatened the most: finance. Antonis Polemitis brought it very much to the point in a nice well monied exchange between himself and Marc Andreesen.
closest analogy for me is voip. Derided, then adopted by telecoms. BTC/fin svc more complex tho
Of course we’re still in phase 1: derision. So it might take a while. Just listen to JP Morgan CEO Jamie Dimon on the matter of Bitocoin:
And honestly, a lot of it — what I’ve read from you guys — a lot of it is being used for illicit purposes.
Dimon surely knows what he’s talking about. Just last November, JP Morgan settled with the US Justice Department to pay a record $13 billion fine for its, hmm, questionable mortgage practices. On top of that come another $2 billion for serving for more than 20 years as Bernie Madoff’s primary bank. But wait, there’s more … nevermind. Last October, JP Morgan set aside a pot of $23 billion to pay all recent fines. Which is more than twice the current total market cap of Bitcoin, lingering currently just a bit north of $10 billion.
But no need to feel sorry for Jamie and JP, the gargantuan fines leave neither the bank nor its CEO impoverished. Last year, the bank still pocketed more than $5 bn, and Dimon got a 74% raise for this impeccable too big to fail, to big to jail-performance.
Sounds like a great opportunity for a disruptive technology like Bitcoin.
And some of the people involved in this short exchange are already putting their money where there tweets are :