DAO ≠ D.O.A.

Before we start talking about the great $79 million DAO robbery, let’s make a quick introduction.

The DAO is a Decentralized Autonomous Organization (“DAO”) – more specifically, it is a new breed of human organization never before attempted. The DAO is borne from immutable, unstoppable, and irrefutable computer code, operated entirely by its members, and fueled using ETH which Creates DAO tokens.

Thus spoke The DAO.
Which is just one possible way to implement Decentralized Autonomous Organizations.

A translation attempt into plain English may sound like this:

In traditional western economies, capital ownership, production and consumption are separated entities:

  1. Uber investors pour billions of USD into a company they own.
  2. The drivers invest into production (CAPEX like cars, OPEX like gas and insurances, their time) and pay their USD tribute to Uber’s shareholders.
  3. Passengers pay USD for the ride.

A decentralized autonomous organization isn’t a shareholder  construct, but a stakeholder model based upon securely transferable crypto tokens.

  • Every token holder is a stakeholder in the DAO’s ecosystem
  • Tokens can be held …
  • … or circulated to pay for services rendered or products received …
  • … or exchanged into another crypto token (e.g. Bitcoin) or any legacy currency

synergistic

It’s a radically different type of participatory economy and may offer the chance to fix a dangerous flaw of our current monetary system:
– the “real” economy is dwarfed by an unbridled financial system
– the financial sector is pretty much decoupled from the “real”, productive economy
– but both spheres share the same tokens to exchange value: our traditional currencies like the EUR, the GBP or the USD
– those currencies are basically minted and controlled by the aforementioned financial sector.

A DAO token works like a programmable complementary currency. Traditional alternative systems looked like the Wörgl Schilling: a piece of paper used to locally exchange value to keep external problems at bay. Being just locally accepted is the key constraint – and the defining feature. Because the intent behind is purely local.

freigeld1

DAO tokens resemble complimentary currencies in this. They are constrained currencies. Traditional currencies are pretty much universal: highly fungible currencies like the USD or the EUR can be used to pay for any kind of product or service or asset pretty much all over the globe.

The Wörgl Schilling was only valid in Wörgl, the Bavarian  Chiemgauer is only accepted in this beautifully set local economy:

chiemsee_vonkampenwand … but not in Wörgl, located just a one hour car drive further down south in Austria.

Like with traditional complimentary currencies, the DAO token’s constraint is it’s limitation to a specific economy. It may be tied to a locality (like with the Chiemgauer) or a specific private entity (like airline miles, which are a certain form of private currency) – but is much more versatile.

In the DAO, the token is not only used to exchange value.

  1. Every token owner is a stakeholder of the specified economy.
  2. The token itself is programmable. Ideally, it becomes an intrinsic part of the whole process, not just the value exchange.

Token holders are a bit like owners of printed bearer shares: he who owns the physical share is the rightful owner of the asset represented in the paper. The company’s central ledger only lists the shares, but knows nothing about their ownership.

Crypto tokens, be it DAO or Bitcoin, pretty much automate all authentication, validation and transaction processes needed with an amazingly safe technology. Traditionally, all those transactions are safeguarded by a central authority. To buy shares of a company, you need to trust the company as the issuer, the stock exchange as the trade facilitator, the clearing house as the middleman, the settlement process for the exchange of assets (money/shares), and the custodian for administering your held securities.

Crypto transactions are pretty much trustless, meaning: as long as the crypto process is untainted, the whole chain of the transaction, from trade facilitation, clearing, settlement to custody services is inherently secure.

So how come somebody can instigate a rather dubious $79 million transaction?

Let’s go back to the trustless thing. If you read really carefully, you might have noticed I left an important piece out of the trustless specification: the issuer of the share.

victor_lustig

And here’s the reason. Meet Victor Lustig. The man who sold the Eiffel Tower – twice. His con was actually pretty hilarious. He convinced a couple of Parisian scrap metal moguls that he represents the French government and they should bribe him for the right to melt down the rusting iron world wonder.

Some misplaced trust in charming Lustig later, the tower was still standing, the government still the owner of the cast iron hulk and Lustig’s target, one of the scrap metal dealers, a bit richer in experience and bit poorer in funds.

A trustless crypto transaction wouldn’t have affected Lustig’s con at all. Like every gifted con man, Lustig leveraged the conditio humana.

Every transaction is a chain of trust. The perceived transaction started with a land register certifying the French government as the rightful owner of the tower and ended with a cash transfer, a trusted means of value exchange.

But in the Eiffel Tower case, the starting point of the trust chain was Lustig and his made-up credentials. Or, to use crypto speak: the Genesis transaction was not building and owning the tower, but Lustig coming up with a fake identity and a masterfully implemented storyline.

Let’s go back to the DAO. In a rather spectacular crowd funding, a quite substantial amount of (crypto) money was raised. The basic premise:

Historically, corporations have only been able to act through people (or through corporate entities that were themselves ultimately controlled by people). This presents two simple and fundamental problems. Whatever a private contract or public law require: (1) people do not always follow the rules and (2) people do not always agree what the rules actually require.

From the DAO Whitepaper.

The offered solution:

The DAO is self-governing and not influenced by outside forces: its software operates autonomously and its by-laws are immutably chiseled into the Ethereum blockchain.

https://daohub.org/about.html

Or, in a nutshell:

  • the problem: people are not always following rules or not always really agreeing what those rules really do mean.
  • the solution: immutable contracts.

Which are a really great solution for many real world problems. But not for the problems they try to solve. Because they missed (3) people cannot foresee all consequences a contract or by-law may have

This is not a new thing, born out of crypto contracts. Matt Levine brings a great example in his Bloomberg piece Blockchain Company’s Smart Contracts Were Dumb.

One more story, one of my all-time favorites. The California electric grid operator built a set of rules for generating, distributing and paying for electricity. Those rules were dumb and bad. If you read them carefully and greedily, you could get paid silly amounts of money for generating electricity, not because the electricity was worth that much but because you found a way to exploit the rules. JPMorgan read the rules carefully and greedily, and exploited the rules. It did this openly and honestly, in ways that were ridiculous but explicitly allowed by the rules. The Federal Energy Regulatory Commission fined it $410 million for doing this, and JPMorgan meekly paid up. What JPMorgan did was explicitly allowed by the rules, but that doesn’t mean that it was allowed. Just because rules are dumb and you are smart, that doesn’t always mean that you get to take advantage of them.

Contracts have always been a complicated affair. Because they have to formalize a stable framework around fuzzy intentions by using language – which as a tool is inherently fuzzy as well.

The proposed solution for this inherent fuzziness created by the mismatches of intent and description and the thereby caused mismatching realities is probably a bit too ambitious: bug free software.

 

 

And what do you know: somebody smart quickly outsmarted the contract.

I have carefully examined the code of The DAO and decided to participate after finding the feature where splitting is rewarded with additional ether. I have made use of this feature and have rightfully claimed 3,641,694 ether, and would like to thank the DAO for this reward.

It’s unclear if the text has been written by the hacking trickster, who just wants to add a bit of insult to the injury. But the consequences of his contract are actually rather unclear as well. He may just be entitled to keep the load.

Because The DAO as a non-organisation constructed itself around the premise of its own infallibility. Read this part of self descriptive hubris:

The DAO will be deployed as an exact implementation of the Standard DAO Framework. The Whitepaper therefore describes perfectly how the DAO functions and is a great place to start learning more.

… exact implementation … describes perfectly …
Well. Obviously not that perfectly exact.

In the DAO’s belief system, acts of people are the problem, so let’s move them out of the equation. This created an entity ready to be preyed upon by other people of rather questionable intent. With the attack vector being people not being able to create 100% perfect contracts.

Hard core smart contractors don’t see a problem with this. Win some, loose some: it’s part of the package of immutability. Changing the rules after the fact may be technically possible, but violates the core principle of a Decentralized Autonomous Organization. Rolling back those transactions by an deus ex machina-act would inherently destroy the trust in the perfect engine: mind you, it worked actually without a fault.

Which is probably right. Because in their hubris, The Dao tried to construct themselves as an infallibility engine without any meaningful mechanisms for mediation or arbitration or recourse. And saving The DAO by ex-post changes might really hurt the underlying case for Decentralized Autonomous Organizations.

On the other hand: creating a machine, which enables smart contract-con men to systematically defraud unsuspecting token investors, who wouldn’t have any path of recourse at all … this sounds like a solid way to implement fringe system of very limited reach and effect.

As VC Albert Wenger writes: The Path to  Learning requires Failing: The DAO

Blockchains and smart contracts are amazing new tools in our overall technological toolset. We have to learn how to deploy them to the best uses (many of which have yet to be invented). That will take failures. The DAO is not the first one (e.g., Mt. Gox) and won’t be the last one.

Unfortunately, the first DAO failure might have been somewhat expensive.

 

 

 

 

 

 

Excess Capacity

What’s the economic driver behind the so called sharing economy? Robin Chase points into one direction. Thanks to technology, we can build platforms which enable us to harvest the excess capacities all around us. As a co-founder of Zipcar, the car-sharing trailblazer, she knows what she’s talking about. Owned cars are sitting around most of the time. Rentals you get for 24 hours (which, hopefully, is a bit longer than you’re actually going to drive it). A Zipcar you get by the hour. Daimler’s Cars2Go are even rented by the minute. That’s harvesting the excess capacity of a massive chunk of hardware which usually hangs around at the curb like idling teenage mall rats after school.

Excess Capacity
Robin Chase on Excess Capacity: too much of something can become a good thing.

Her talk was partly a compressed version of her new book Peers, Inc. The gist: linear solutions for exponential problems just don’t scale. Peers, Inc. is about harnessing massive problems with scaling. How was AirBnB able to quickly offer more as much bed-inventory as the largest hotel chains? Because their technical platform leverages the power of the people to pool their excess capacity.

Of course we do know by now, that some of the drivers of the sharing economy are not that benign. Granny letting out her spare bed room once a year sounds nice. But Mr. Greedy creating new inventory by taking 3 bedrooms condos off the rental market to rent them out by the day is a rather excessive approach to excess capacity.

Harvesting excess capacity is the underlying scalable model. Mr. Greedy may be driven more by taking advantage of regulatory arbitrage. But this is a problem which fairly easily can be remedied.
The complicated part starts when sharing economy entrepreneurs understand, that one excess capacity in later stage capitalist societies is man power. Look at Über: the drivers take on the capital expense of buying the car, take on the operating expense of maintaining it, take on all the risks.

And that’s how we come back to Robin’s talk. The occasion was our biweekly Bitcoin Startups Meetup. How does this relate? Currently, most sharing economy platforms are driven by shareholder value. The Bitcoin (or crypto) model works differently. It’s a stakeholder model.

Some small steps are already happening. A couple of Denver cabbies are asking: What If Uber Were a Unionized, Worker-Owned Co-Op? Joel DietzSwarm is pushing forward in many different ways.
Crypto-based decentralized applications don’t need statements like “Don’t be evil”. Their DNA is sequenced and public from the start. This includes the potential switch of the underlying economic model, from rent-seeking shareholders to a revenue-sharing stakeholders.

Addendum: here’s some more material from a talk I gave last year on the topic: “The new decentralized sharing economy and crypto coins”

To Infinity and Beyond: Monetary Sci Fi

At ZapChain, the crypto Q&A central, Daniel Cawrey had a pretty funny question: Do you think bitcoin could become the currency of space?
Here’s my slightly enhanced answer.

As sci fi has a tendency to shape future technical realities (think Arthur C. Clarke and the geostationary satellite, think all things Neil Stephenson from his cyberpunk period), and as the pressing need for a non-terran currency may still lay a bit in the future, we should have a look at what sci fi has to tell us on all things currencies:

Credit
Galactic Credit Chips come in handy.

According to Wookiepedia, The Galactic Credit Standard, simply called a credit or abbreviated to cred, colloquially referred to as Republic Dataries, and later known as the Imperial Credit, was the main currency in use in the galaxy since the time of the Galactic Republic.

Around this official currency, alternative currencies seem widespread:

In some other space and time, and in a slightly more post-monetary future, the Federation credit is the monetary unit of the United Federation of Planets. To put things into perspective:

  • a Tribble sets you back 10 credits (that’s obviously before they unveil their rather inflationary reproductional pattern)
  • to use the Barzan Wormhole, the Federation pays a lumps sum of 1.5 million credits and an annual fee of 100.000 credits.

Mars (Total Recall) and the non-radioactive Earth leftovers and its space dominions (Judge Dredd) go for credits as well.

This means:

  • all major centralized utopias rely on a credit based system
  • in their lesser controlled fringes, alternative currencies are highly likely to be accepted

Which shouldn’t be too surprising. A rallying cry like To Infinity and Beyond implies one quite demanding requirement: space is infinite and to conquer infinity you need infinite resources. And to pay for those infinite resources, you need an infinite money supply.

Which is actually not that different from the economic realities of today. Space may be a rather finite commodity for us inhabitants of earth in the early years of the 21st century. But time is endless.
As long as our economic model is based on growth, we will need a money supply which can grow with time – and therefore has to be infinite.

So sorry, BTC or XBT:

  • If Bitcoin or one of its crypto-successors aspires to become THE currency of space, it will need to incorporate the credit principle into its money supply first. A finite resource like Bitcoin or gold will always be on the fringes, be it of future space dominations or the economies of today.
Hyperinflationary reproductional patterns: a Tribble based-currency is not advisable.

.
A dissenting sci fi opinion could be based upon Ian M. Banks wonderful construct of The Culture.
In his interstellar anarchic post-material-scarcity society, us puny humans exist in a symbiotic relationship with tremendously capable (and eternally quirky) artificial intelligences (the minds), humanoids, and other alien species, who all share equal status.
And one side effect of post-material-scarcity for everybody is: units of account, mediums of exchange and values stores are things from a rather barbaric past.

In The Culture, you will just have to forget about credits and crypto-credits and interstellar blockchains. And if you insist on living with the perils and perks of a monetary value system, you can always move to one of the Culture’s lesser enlightened neighbors, which still deal, steal and trade with credits or commodity based currencies.

 

 

Who will win the Bitcoin blocksize war?

My take on this question on Quora: Who will win the Bitcoin blocksize war?

Here we go:

To quote Niel Bohr:

“It’s hard to make predictions, especially about the future.”

But of course we can always make fairly educated guesses.

QuoraThing 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.

Power Hungry Crypto Coins

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).

Power hungry miners: don’t use your CPU to mine a Bitcoin.

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.
How comes?

 

Bad Bitcoin burns the fuel.
Proof of Work: bad Bitcoin burns too much fuel for its own good.

In physicspower 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
  • 2014 ASICs would reduce the load to 0.01

So, basically, we’re currently running at 0.13 nuclear power plants to power up the Bitcoin network.
https://docs.google.com/spreadsheets/d/1_b-H1iA3LSbetHdiDEt46WKEhr-rnW1Jrq1SgZeW4Ao/edit?usp=sharing

Proof of Stake: lower energy consumption helps in many ways.
Proof of Stake: lower energy consumption helps in many ways.

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.

It’s the What’sUpApp-Economy, Stupid!

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.

Cars don't buy cars.
Where’s the money? Messages don’t buy cars.

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

  1. founders and early investors
  2. later stage investors
  3. early employees
  4. service providers to the company
  5. employees on the payroll
  6. 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.

 

 

Bitcoin = Platform 9 3/4

You want to learn what this Bitcoin thing is really all about? Try this well written introduction: Bitcoin: It’s the platform, not the currency, stupid!

Bitcoin: the Nakamoto Express into the digital future is leaving now.
Bitcoin: the digital Hogwarts Express is leaving now.

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 predictionAny 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.

Young Harry entering Hogwarts.
Young Harry entering Hogwarts.

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.