Stacks — Why we Invested in Blockstack’s Blueprint for a New Internet

Note: My firm, Compound is an investor in Blockstack Public Benefit Corp. This post is for informational purposes only and represents my opinions, it is NOT investment advice.

In utopian society, there’s no need for concerns around the devaluing of currencies or security of private information. Individuals can trust that the state and centralized institutions won’t print additional paper money, take unnecessary risks with their customers’ money and data to generate wealth for the few, nor will they ever become victims of hacking and put the masses at risk.

Unfortunately, this isn’t the world we live in. As the world becomes more unpredictable and black swan events become commonplace (Brexit, most recent US presidential election, etc.), it has become more important than ever for users to have individual autonomy over their money, data, and identity.

When we first invested in Blockstack a year ago, we were drawn to their vision of a better Internet where users didn’t have to place their trust in the hands of centralized intermediaries. Just as bitcoin rose from the ashes of the 2008 financial crisis, Blockstack could rise from the ashes of an unpredictable and downright frightening world where the private, personal data of 143 million people was recently hacked and Internet behemoths use our personal data to take unnecessary risks for the potential payoff in the form of profits.

While we haven’t reached a boiling point akin to 2008, the past year has been fraught with headlines relating to the misuse of data and power by the big Internet companies and other large corporations. We’re starting to see the early signs of pushback from the masses, the latest being the result of the rampant fake news and the debate around the effect it may have had on the 2016 election. While to many this may seem like a hyperbole today, I don’t believe that it would be a big leap of faith to suggest that we’re just starting to scratch the surface of this indignation.

While the debate as to whether or not Internet giants should engage in censorship rages on, my hunch is that sentiment will turn to the question of whether or not any single corporation should be in a position to make that choice to begin with. It may only be a matter of time before technology has its own large-scale “Occupy Wall Street” movement. As James Dale Davidson writes in The Sovereign Individual, “The more apparent it is that a system is nearing an end, the more reluctant people will be to adhere to its laws.”

If Satoshi Nakamoto gave the masses a powerful tool to protect ourselves from the financial institutions in Bitcoin, then Blockstack is working on providing us with those tools to protect ourselves from data-guzzling large corporations.

Ethereum’s dramatic price increase and developer interest has finally spurred the development of many decentralized applications (dapps). Over the course of the past year, cryptocurrency (crypto for short) enthusiasts have begun to imagine what this future may look like. Developers and users alike are dreaming about these possibilities, challenges, and opportunities. However, there are certain open questions that still remain around scalability (and as a result, usability), discovery, incentives, and mainstream adoption.

Those of you who are reading this are probably familiar with Blockstack’s vision for decentralized applications but for those who aren’t, Blockstack has designed and built a new Internet where users don’t have to trust remote servers with their data, removing intermediaries and using blockchains to secure the connections between applications, logic and data. Within this new Internet, they’ve implemented services for identity, discovery, and storage so that there are no single points of failure or blind trust in centralized entities. However, it wasn’t made clear to the public until recently in the Blockstack Token Whitepaper how they planned on achieving some of the intricacies of their goals. Below I’ll go into more detail about the ways in which Blockstack addresses some of these open questions.

Scalability

Given the fallout from the recent Parity hack and the lack of proven on-chain scaling designs, it’s starting to become clear that in order to achieve the necessary scalability for mainstream adoption, logic should be kept off-chain. Keeping the logic on-chain is effective for censorship resistance, but when it comes to consumer decentralized applications, it’s hard to see why that would be necessary. As long as users can safeguard/control their own identity and data, they can interact safely and securely with decentralized applications without 99%+ of the risks that exist today.

Blockstack achieves this using a virtualchain design, which is similar to a virtual machine where the logic to process operations sits. While Blockstack uses Bitcoin as the base layer chain, users don’t need to interact with it directly for the majority of operations. In Ethereum for example, all nodes have to process each computation/transaction, but in Blockstack’s design most of the logic lives outside of the blockchain layer and the nodes have to process a small shared state that works like pointers to other information. Data isn’t stored on chain, but rather Blockstack uses existing infrastructure for data storage. Only pointers to the stored data are stored on-chain and therefore Blockstack can achieve superior scalability versus what we’ve seen with other dapps to date.

You might be wondering how this is an improvement over the existing Internet given the fact that data could be stored with traditional storage providers like Dropbox or Amazon S3. With Blockstack, users don’t actually need to place trust in these storage providers as their data is encrypted and only decrypted once the data is delivered to the end user. This is in contrast to today’s Internet design whereby data is stored on servers owned (or leased) by the website/application. Any data that the user generates while using these services is owned by the company behind the website/application. This allows them to profit off the sale of targeted ads, data, and/or through “personalization” of the experience. This seems backwards given that in the offline world we own and control our own physical possessions, but it also creates large centralized points of failure where a hacker could steal and/or leak all of the company’s users’ data.

I won’t go into detail about the aspects of the protocol you may have heard of such as the Blockstack Name Server (BNS), Atlas Network (mapping layer), and Gaia (decentralized storage layer) given that Nick Neuman did an excellent job of covering this in the Token Economy over the weekend. I recommending reading his piece which you can find here.

Usability

Another detail, also related to scalability is how to best support light clients. For many, the smartphone is their primary (or sole) computing device but running a full node isn’t possible given our current resource-constrained mobile devices. While Blockstack users can certainly run full nodes, Stacks also allow them to independently verify the longest Blockstack blockchain if they’re accessing dapps on mobile devices. Given that users oftentimes prefer to use applications on their mobile devices, this is a major push towards better usability and mainstream adoption.

This is done through proof-of-burn mining, which essentially allows light clients to “burn” a cryptocurrency in exchange for another, thereby establishing the longest fork by choosing the one with the most amount of cryptocurrency that’s been burned. This allows these clients to access the correct current state of the network by asking a group of (public) Blockstack nodes for the latest consensus hash and state without having to do the impossible and run a full node; the nodes can independently verify which blockchain state is correct if some malicious node gives them a wrong copy (a single honest node amongst a group of public servers is enough for this).

Incentives

As we’ve seen time and time again over the course of the history of technology, operating systems such as Windows and iOS have (or had for the former) very powerful network effects which allowed them to dominate their respective markets. The blueprint has been to provide a consistent suite of tools and interfaces, attracting developers, which in turn attracts more users, attracting more developers, and so on creating a virtuous cycle.

But how do you start the cycle and attract those early developers to begin with (aside from making it very easy to build applications)? In the case of Windows, they were lucky to be chosen as IBM’s partner who already had massive penetration in the enterprise PC market, giving them access to a large addressable market as jet fuel. In Apple’s case, they were already an established company with strong brand recognition so there was significant demand for the iPhone early on. This demand coupled with the consistent suite of tools for building and distributed iOS apps, similarly provided Apple with what they needed to kickstart this virtuous cycle.

Unfortunately for Blockstack, they’re quite unlikely to catch a break like Microsoft did and haven’t previously sold millions of mp3 players and computers like Apple. Instead, Blockstack is introducing a new form of mining dubbed “app-rewards mining”. App-rewards mining incentivizes developers to build applications on Blockstack by distributing rewards to them in the form of tokens (dubbed stacks). Independent entities known as App Reviewers will participate in the curation process of selecting eligible applications and assigning appropriate weights to each application. This process also provides functionality akin to a form of curation market, allowing developers to better distribute their apps to users, enabling better usability through discovery for users as well.

These economic incentives should theoretically increase competition and as a result the quality of dapps built on Blockstack. This would provide Blockstack’s platform with what’s necessary for the aforementioned positive feedback loop as the quality of dapps will increase as more developers compete to create the best applications, leading to more users, which attracts more developers as the addressable market size increases.

Another important aspect of app-rewards mining relates to reducing the necessity for decentralized app developers to launch their own tokens. It has become commonplace for each and every application and protocol to launch their own token and for most of these projects, the only use case for that token is fundraising despite what’s often argued in whitepapers. One of several problems with this line of thinking is that these tokens will have extremely high velocity and as a result, even if demand were to increase significantly, supply wouldn’t decrease as users have no incentive to hold the token (as Kyle Samani from Multicoin Capital described in detail here). This would keep the price of the token stable even with a large, engaged user base. Once that becomes more apparent (which has already begun), most of the market won’t purchase the token before the product has launched and therefore its sole use case as a mechanism for fundraising is rendered obsolete.

For developers there are few other ways to profit from the work they’ve put in developing dapps, even if most of the crypto community is urging otherwise. Due to the open performance questions mentioned earlier, the addressable market for decentralized applications is likely rather small right now. Developers could charge users in ether or bitcoin, but don’t necessarily share in the upside given the state of the market today and maturity of those cryptocurrencies. In the same way that Google spurred value growth for the entire market, building widely-used applications on Blockstack would increase the size of the pie, giving those developers skin in the game if they were to earn stacks for their dapp’s usage (in addition to fees they could charge in-app).

Conclusion

I’m often asked about what I believe to be the timeline for mainstream adoption of decentralized applications. Up until about a year ago, I used to say that I thought it would require a catalyst to drive adoption, a black swan event of sorts (which I thought was inevitable so maybe it wasn’t really a black swan event) whereby a series of political events and/or a very public betrayal of trust (intentionally or unintentionally) from high profile companies who store our most precious data. Well, these events have occurred (and seemingly are happening more frequently), so now I believe that it’s just a question of building the right tools for both users and developers to jump start an ecosystem, much in the same way that Netscape and AOL jumpstarted mainstream Internet adoption before Google significantly increased market penetration.

For users, there are only two key components that matter when it comes to privacy — identity and data. Blockstack has put these components in place through BNS, Atlas and Gaia. Developers don’t need to worry about building these out and can just focus on the experience that users will interact with through users’ data (like Facebook or Google OAuth except users own their data). Once users have registered their name on BNS and interact with the applications, they’ll continue to collect their own data. This reduces the barrier to entry that previously existed on the Internet when big companies kept the data siloed.

For developers, economic incentives and distribution are the two components that matter most. To date, it’s been difficult to attract capital for dapps given that investors prefer to invest in tokens due to liquidity and potential speculation, as well as an unclear m&a market. Jake Brukhman from CoinFund did an excellent job of addressing this recently. Blockstack’s Signature Fund and app-rewards mining addresses these challenges, and in the long run, my hope is that it assuages the current investor concerns about investing in dapps.

Blockstack’s core tenets aim at attracting more developers, leading to increased competition and subsequently innovation. It is now my belief that it is this virtuous flywheel effect that will lead to mainstream adoption of a decentralized Internet over time, just as we’ve seen time and time again over the course of history when it comes to technological progress.

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Disclaimer: The Blockstack tokens (also known as Stacks) are a crypto asset that is currently being developed by Blockstack Token LLC (“Blockstack Token LLC”), a Delaware limited liability company. Blockstack Token LLC may issue securities representing interests in the Blockstack Tokens in the form of interests in the Blockstack Token Fund and Simple Agreements for Future Tokens.

As with any investment, purchasing interests in the Blockstack Token Fund or interests in a simple agreement for future tokens involves risk. You must make your own decision about whether and how much to invest. Blockstack Token LLC and its affiliates cannot make any investment recommendations or otherwise provide any investment advice. Blockstack Token LLC has prepared offering materials (including a term sheet, purchase agreement and risk factors) for the Blockstack Token Fund and the simple agreements for future tokens. Before you invest, you should read the offering materials related to your investment. You may get these documents on this website.