“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 :
Bitcoin sucks. No, seriously. Mining is so energy hungry, that the whole system has to have been conceived by a bunch of climate change deniers (which might even be true). The clients look like the wet dreams of calcified COBOL programmers. And even worse: voodoo chart analysts are already refocusing from NYSE data to MtGox exegesis.
Bitcoin is great. No, seriously. If you don’t believe me, ask Marc Andreesen (he who did put a nice face on the webs, so that everybody can use it). Now he thinks, that Bitcoin matters and wrote everything up in a must read New York Times OpEd (which true Bitcoin enthusiast are already nitpickingly try to dissect).
It matters, because …
… Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.
This may sound a bit unwieldy. But, as he says: The consequences of this breakthrough are hard to overstate.
Let me repeat this one more time: The consequences of this breakthrough are hard to overstate.
This may sound a bit strange, if you look at the most popular crypto currency use cases of today, currency and asset. But, as stated before: there are so many more things you can do with a distributed crypto ledger.
Bitcoin is a lot of things. But definitely not perfect (see above). So how about looking for competing technologies? Depending on the use case, Litecoin seems to have some advantages over Bitcoin – and already a quite sizeable followership. nxt claims eco-friendly mining, because of its 100% proof of stake (PoS) mechanism versus the proof of work (PoW) mechanism other coins are based on. The upcoming Ethereum plans to overtake Bitcoin as a platform by offering a sufficiently powerful Turing-complete scripting language on top of all things crypto. Says Ethereum:
Up until this point, most innovation in advanced applications such as domain and identity registration, user-issued currencies, smart property, smart contracts, and decentralized exchange has been highly fragmented, and implementing any of these technologies has required creating an entire meta-protocol layer or even a specialized blockchain. Theoretically, however, each and every one of these innovations and more can potentially be made hundreds of times easier to implement, and easier to scale, if only there was a stronger foundational layer with a powerful scripting language for all of these protocols to build upon.
Of course, there are some strong arguments to build your application on top of the Bitcoin platform as well. The ColoredCoins guys explain:
An alternate cryptocurrency could be specifically designed to transport colored coin values. However, Bitcoin has the largest hashing pools, which means Bitcoin is more secure and reliable. An alternate cryptocurrency would have very hard time providing the secure and stable distributed computational network that Bitcoin provides.
So many pros and cons. What would Andreesen do? I asked him a slightly leading question.
And that’s his clear and concise answer:
The power of Bitcoin lies in the network. Not just the physical network (which is already pretty impressive by itself). But the network of people involved. It’s not the tech specs of Bitcoin you have to beat. It’s the mindshare, the user base, the developers working on new stuff, the entrepreneurs finding new use cases.
And looking at some of the newly minted altcoins, all scepsis seems mostly valid. Pump and dump scams trying to attract altcoin-forex investments into cloned currencies of rather dubious value compete against more serious contenders with silly names like Dogecoin and potential gamechangers like the aforementioned Ethereum.
Of course Andreesen knows just too well, that sheer dumb numbers can easily kill any more aptly contender: the browser wars were decided by Internet Explorer’s preinstalled Windows masses, not Netscape’s superior technology. So he goes now by George Santayana Those who cannot remember the past are condemned to repeat it (and surfs the Bitcoin wave).
Not all metaphors are created Turing-complete. IE may have killed Netscape. But the three browser musketeers Firefox, Chrome, and Safari finally pruned the mighty Richelieu of HTML. And only if you’re a teensy weens altcoin, the mighty incumbent is BIG Bitcoin. For everything else, there’s VISA and MasterCard.
There’s a paper handed around between Bitcoin-friends which has the potential to scare the bejesus out of the cryptocurrency world. In June 2013, Newsdesk Media published a colorful magazine called G8 The UK Summit: Lough Erne. The esteemed list of authors include French president François Hollande, the president of the European Commission José Manuel Barroso, Barack Obama, and here we go, James Lyons, CEO of the International Cyber Security Protection Alliance (ICSPA). His rallying cry, allegedly to protect digital economies from cybercrime: ban alternative payment mechanisms, such as Bitcoin. Because they can enable criminal and terrorist groups to launder money and fund their operations.
As some people might remember, organized crime did not start with the Internet. Nor is money laundering a proprietary feature of crypto-currencies. Just ask your (un-)friendly neighborhood mobster. His family might be in the funds laundering business since some centuries and a half. And, especially regarding Bitcoin and its public ledger, large scale money laundering is not a built-in feature. To the contrary: larger transactions leave quite a footprint in the system.
The good thing about Lyon’s two page rant: despite the officially looking publication, policywise there’s nothing set as of so far:
If the leaders of the European Union and United States could be convinced to take a lead on this initiatives, … it would also strike a blow against those who would try to destroy the fabric of our world’s well-being, begs Lyons.
Of course, some of those world leaders might be inclined to remember the last time somebody almost succeeded in destroying not just the fabric of our world’s well-being. After all, bespoke leaders are still busy cleaning up the fallout from an almost final financial Armageddon (success not guaranteed). Alternative payment mechanisms, such as Bitcoin were definitely not at the root of this evil: They were not even around in 2007, but later on conceived as a potential remedy to skullduggeries inherent in the existing system, where the proliferation of weapons of financial mass destructions has reached the level of let’s say Brooklyn, Berlin-Kreuzberg, and Clacton-on-Sea having become rogue nuclear powers of their own.
So why is Lyons fighting so hard to ban these payment mechanisms? The ICSPA explicitly exists to fight against cyber frauds in electronic commerce, which mostly involves credit card technologies conceived for a non-digital non-networked world. Crypto currencies could be applied as a vaccine against those threats. OK, look no further than into the fairly short member list of his lobbying organization: a bunch of security services companies, a UK-based retailer, the global PR powerhouse Edelman, and, oh, woopsie: Visa Europe, the bank-owned credit card giant. Oh yes, alternative payment mechanisms could definitely become a threat to Visa’s well being: if they do not want to co-opt the remedy for the self-inflicted ills they’re suffering from (and which are the reason they finance a body like the ICSPA, whose executives not just do lunches with MPs, but are a liaison to law enforcement bodies like Europol as well).
The really bad thing is: Lyons knows his core audience pretty well. He and his ICSPA share table and bed with the powers that be on a fairly regular base. At theISSE 2013security conference in Brussels, Lyons explained how the world needs to reset the clock on trust after whistleblower Edward Snowden revealed the US Prism internet surveillance programme. Time to review cyber trust, says ICSPA, headlined Computer Weekly.
Lyons proposed course of actions: Governments need to do a better job to help citizens to understand the reasons for conducting internet surveillance. How would he achieve that? Combining international efforts to clamp down on child abuse pornography could help to rebuild relationships and trust between business, law enforcement and governments. Ah, got that.
And, not to forget, the Ceterum Censeo, asking for the tit for tat: an international collaboration in outlawing ignitable currencies such as Bitcoin.
How will (or should) the Bitcoin community react to such efforts?
There are three main courses of action: ignorance may sometimes be bliss and is very much ingrained into the human nature (duh!), but can have some really bad side effects. So, what else? Following the lead of traditional lobbies like ICSPA and start talking to the government as well, negotiating with regulation bodies, and getting law makers up to speed. The US-based Bitcoin Foundation seems pretty active in this area. In Novemer 2013, General Counsel Parick Murg testified at a Senate Homeland Security and Governmental Affairs Committee hearing entitled, “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies.”
And yes, it’s really important: if you want to make real business, legal certainty is not a nice thing to have, but a precondition.
But not everybody is embracing this appeasement approach. Are nice talks enough, when the chain dogs of the incumbent competition have skipped the mere bite reflex and are openly out for a kill? Not to forget: Bitcoin is still a bit player in this lobbying arena. And let’s not forget: the dark forces of financial evil did not just survive their own suicidal attack on the global financial system. They got nicely remunerated for it as well, with all blessings of the system they almost destroyed. They achieved this with hardcore PR, well oiled lobbying, and being a fundamental building block of the current system.
No way, say the makers of the Dark Wallet: Many prominent Bitcoin developers are actively in collusion with members of law enforcement and seeking approval from government legislators. We believe this is not in Bitcoin user’s self-interest, and instead serves wealthy business interests that make up the self-titled Bitcoin Foundation.
Parts of the community feel the same and voted with their wallets for the Dark Wallet: via Indiegogo and direct Bitcoin contributions they collected fairly quickly more than a hundred thousand Dollars.
War! Schism! Whatever! We’re talking protocol here. The only relevant schism would be a nasty fork. At its current state, both parties may distrust each other. But on the other hand, it’s two approaches which are nicely complimentary. Talking to the government is not an inherently bad thing. Just remember: really successful pirates like Francis Drake had their letters of marque, thereby minimizing theirs risks and maximizing their profits. At the same time you should never stop working on strengthening your own superpowers. The power of Bitcoin lies in being a crypto currency, and not in becoming a complacency coin.
And, besides that: I’m pretty sure that Bitcoin as a protocol or an open platform will not necessarily wipe out all existing financial players. To the contrary: clever CIOs in modern banks will embrace crypto currencies. Why? Have a look at how the current system works. It’s pretty cumbersome at its core. So the next financial innovation may hopefully not be a new and improved weapon of financial mass destruction, but an improvement of the inner workings of an ancient machine.
Here we go. A single Bitcoin is now worth more than one thousand Dollars. Success, success. Well, kind of.
I don’t want to be a spoil sport, but let me dissect a bit what’s going on there. If you see Bitcoin as a currency to run your everyday business with, you run into some really crazy problems.
First thing, if you’re a mom and pop store, your accountant will have to introduce you into a multicurrency environment – which has to deal with a type of currency, which makes the volatility of old Italian Lira look like an easy thing to handle. All spikes and drops have to be accounted for for your taxes. And drops can have the unpleasant side effect that you finally make a loss on a deal, which was decently profitable when it took place.
The far more complicated part for Bitcoin as a currency (as in medium of exchange) is the built-in deflationary mechanism. The number of coins is finite (and even shrinking over time, as coins are misplaced, destroyed without a backup,…). So as long as there enough people buying, prices will go up driving more people into the system leading prices to go up and so on and so on.
Now, if inflation is bad and the opposite of deflation, deflation must be the opposite of bad? Unfortunately not. Deflation is bad as well.
A smoothly running economy is like stepping outside and it’s springtime, about 20°C (or 68°F for Americans or 293.15 Kelvin for all you mad scientists out there). Birds are tweeting. Bees and flowers everywhere. Everything is well and fine. But here it comes, the two endemic threats towards your monetary wellbeing:
Inflation superheats your environment to temperatures way above the boiling point. If it really gets going, there’s no real way to stop the heat until everything’s cooked way beyond well done. Wood incinerates. Metals evaporate. The end.
And, talking about inflation, economywise, your money (and all your debts, you lucky b*st*rd) evaporates as well.
Deflation cools everything down. 0 Kelvin (or -273.15°C) means: complete standstill. Hell freezes over. The end.
Economywise what’s happening is that nobody want to invest into anything anymore – besides the deflationary currency. Buying is postponed indefinitely, as prices are in a free fall. The beers I paid for with Bitcoins just a year ago (no, I didn’t; it’s a metaphor!) are now worth an iPad Air with 64GB. An exchange rate of 1 BTC = 10.000 USD doesn’t look to farfetched. And we’re not talking really longterm here: the last tenfold increase took about a year. Do you really want to buy a beer right now – or save this BTC for now and buy yourself a Ferrari the day after tomorrow?
Which just translates into: in its current state, BTC is a really crappy medium of exchange. But an interesting money store. Highly speculative, with really interesting and not as common risk factors involved. But, hey: as long as it works, it works.
For some people it already worked pretty well. A friend of mine told me about a developer he met. He literally had found on his hard disk a stash of 40 BTC he had bought way back then and completely had forgotten about. The windfall buys him a brand new car – if he’s cashing in now.
It’s stories like this driving the BTC universe. And rightly so. Because investing in BTC isn’t any more esoteric than buying synthetic ETFs, investing in a growth stock (meaning: a company which is not making any money in the foreseeable future, but grows at a maddening speed, while nurturing the promise of phenomenal future riches wich are priced into their stock price as of today), buying yourself some rare stamps, or spending all your disposable EUR and USD and whatevers on fine arts or collectibles like signed baseball trading cards.
It’s fun, it’s risky, it’s exciting, and there might be a monetary benefit coming out of your actions (or inactions, see above).
But wait. The really good about Bitcoin is not just enabling you to make a quick buck (or loosing as quickly).
The really good about Bitcoin is about being what it technically is: a cryptocurrency, which at the same time is a rather volatile (meaning: still crappy) medium of exchange, a quite exciting value store (meaning: of highly speculative interest) – and a software platform for trustless transactions.
The equation goes a bit like this, with
A being the great growth in exchange value driving people and monies into platform development
B to be defined as the possibilities coming with the promise of becoming a universal medium of exchange, which keeps people and monies in the game.
And now, tadah:
A + B = C
And C stand for:
the resulting Bitcoin-related cryptocurrency software and platforms exceeding by far the effects of Bitcoin as a currency.
Trustless transactions is one of the major keywords here.
If you look at any kind of transaction between parties, basically we’re looking at a construct of a trustworthy contract between trusted parties using a trusted system. If you buy some real estate, you do want to know that you really bought yourself the Eiffel Tower from this trustworthy seller, when the trusted notary signed off the deal.
Trustless systems take most of this load off you. Because you do not have to trust all participants in the transaction. The model established by Bitcoin works pretty well for currency-type transactions. But there are already system out there using the infrastructure for something quite different. Since a couple of months, a group of students around Cornell’s Emin Gün Sirer is running the Virtual Notary.
With the following caveat:
It is not an official, legally-recognized notary, whose definition is provided by law, whose statements are court-recognized, and whose procedures are regulated. For operations that require legal standing, you should seek the help and services of an official, state-recognized notary. Please do not use Virtual Notary for something critical, like your will — you should enlist the services of a lawyer and a certified notary public.
The Virtual Notary does some nice and fancy things by itself. But finally leaves some code in the Bitcoin blockchain, using it as a public ledger, which cannot be altered.
In the same area, but pretty new around the block is Proof Of Existence. The service allows you to anonymously and securely store an online distributed proof of existence for any document and looks amazingly easy to use, with Argentine developer Manuel Aráoz suddenly finding itself at the center of interest of some quite interesting folks.
The real fun starts with two different approaches. Both are not just about leveraging the existing Bitcoin infrastructure, but by enhancing it by establishing new protocols on top of the Bitcoin protocol. That’s why J.R. Willett, masterbrain behind the Mastercoin project, claims for himself to be the author of The Second Bitcoin Whitepaper (with the legendary inventor of Bitcoin, Satoshi Nakamoto, who more or less singlehandedly started the whole craze, being the author of whitepaper No. 1).
Mastercoin is to Bitcoin as HTTP is to TCP/IP, Willett writes on Quora. We’re building a new protocol layer on top of Bitcoin with a dizzying array of cool features that have never even been done before anywhere. Things like distributed exchange, distributed betting, distributed e-commerce, and coins which can track external values like gold or U.S. Dollars without trusting a human being to back them.
Maybe even more exciting are the possibilities of Colored Coins, as it seems, well, a bit more open than the fairly closely held Mastercoin-project. Colored Coins is an open standard protocol, just like http and bittorrent, to exchange value over the internet, as they state rather matter of factly. Today there is no such standard for an exchange of value on the internet … Today Bitcoin is an amazing protocol, but the only asset you can hold on Bitcoin is the BTC.
The last sentence is probably core to understand all things Bitcoin.
Bitcoin is a protocol
One possible use case is holding BTC (A.K.A. Bitcoins) in this system