Blockchains Digitize Assets: Internet 2.0
For those of us who worked in tech in the mid-90s, the Netscape years were a crazy time. From the birth of Internet 1.0 - the digitization of information to now - we’re still seeing the magnitude of the effects in 2017 in media, retail and politics.
Blockchains are making me more excited about technologies than I have been in over 20 years.
Blockchains are going to power Internet 2.0. They are going to digitize assets.
Internet 2.0 could be as valuable and potentially even more disruptive than Internet 1.0.
In the summer of 1995 I was working at Morgan Stanley in Menlo Park as a junior analyst in the tech group. I’d just been transferred there from New York. One afternoon I got a call from Bill Brady. Bill, along with Frank Quattrone and Quincy Smith, was shepherding Netscape through its IPO. It was oversubscribed many times over. Filed at $12 per share, Netscape had just been refiled at a higher price range. I was working on another deal, but Bill had me double check the numbers - he wanted Morgan Stanley to price the Netscape IPO at the highest price without triggering another delay in the registration process. The shares were priced the following day at $28, opened at $71 and closed at $58.25.
There was excitement by press and investors for Netscape’s browser as a key enabler and point of aggregation, as well as all the new .com ideas. They were not discussing the merits and consequences of the underpinning protocols such as TCP/IP, HTTP, SMTP, SSL and other important acronyms like HTML.
Netscape’s browser share had quickly shot up to over 95%. Many years later, while the Netscape story ultimately would wind down, those acronyms, the protocols of Internet 1.0, were far more enduring and impactful. They would, in many ways, change the world.
Internet 1.0 - the digitization of information - triggered the reshaping of several industries and trillions of dollars. You could see that protocols of the Internet and the Web would change everything.
What was hard to see at the time was which would be winners and which would be losers. AOL and Netscape were clear winners until they weren’t. Search engines had no barriers to entry until they did (Google) Social networks created no value from usage until they did (Facebook). So many .coms went to zero. And occasionally, a company that began as frivolous (ebay) ended up becoming wildly enduring, or the founder of one that could have gone bankrupt (Amazon) became one of the richest people alive.
Many investors who did well from the Internet 1.0 did well because they were long the Internet 1.0 protocols and growth of the industry, not because they had any particular skill in discerning the long term winners from the losers. More recently, if you had invested in every company that presented at Web 2.0 Summit at the Palace Hotel, you would have backed losers, but also Facebook, Twitter, and Dropbox.
Of course it was far more interesting to talk stocks than discuss protocol implications.
In 2017, as they say, it’s deja vu all over again. During the height of the Internet 1.0 bubble, tech market caps reached $1.8 Trillion. Today the value of all blockchain networks is (only) around $150 billion.
But there are many many similarities. While the press and many investors are focused on the cryptocurrencies of the day and the ICO craze, I’d like to unpack the consequences of the foundational elements of blockchains. There are a lot of people working on making Internet 2.0 happen.
The foundational elements of blockchains are as profound as those that created Internet 1.0.
I hope to also show how we can apply the lessons learned in Internet 1.0 to understand Internet 2.0: some ideas for why and how blockchains will reshape even more of our global economy.
1995, you met people who understood what the Internet and web protocols were all about, and while fun to listen to, some of them would have wacky ideas about where it would go and left you questioning their (or your own) grasp on reality. Alternatively, you met wise and successful people who dismissed the Internet as a passing fad, citing the many .com projects that were clearly going to fail. Many of the latter group were correct on their specific objections. But they couldn’t have been more wrong in the aggregate. Many of the former were wrong about the specific ideas they thought would endure, but they couldn’t have been more right in the aggregate.
I’m having those conversations all over again about blockchains. The early adopters, the true believers and the skeptics. All come with specific opinions or uninformed disbelief. Most will be proven wrong. Bitcoin is today’s Netscape and maybe Bitcoin isn’t around in 20 years - or maybe the network effects take it to tens of trillions of dollars as money becomes digitized. ICOs are the new .coms and maybe most of the them will go to zero. But some of them or a yet to be built blockchain may become absolutely massive. We don’t know.
In future posts I’ll touch on three more things in greater depth.
1. The tech potentially isn’t even the most disruptive thing: the ownership and economic model is. Some blockchain networks are built without a corporation, and the value belongs to network participants in a fractional ownership model. Many tech companies have been bumping up against issues such as IP vs Open Source Software (FOSS), the network cold start problem, and stock based compensation. For many areas, the blockchain network model could become a better economic and ownership alternative than the modern corporation.
2. The tech is pretty pretty profound. Blockchains are Internet 2.0 - similar to the web, but for assets. Each set of protocols enables permissionless contributions to the network, network aggregation and permissionless exchange - and the whole thing is programmable. Internet 1.0 protocols enabled information to be digitized and programmable. Blockchains (Internet 2.0) allow things of value to be digitized and programmable. The size of the assets and industries built on assets that will be radically changed is over $100 trillion - far larger than the information industries that were digitized by Internet 1.0.
3. How should one invest? If this is a new asset class (and many think it is), then it demands an approach tailored to the specifics of the industry. The economic value of the network is often capitalized in a fractional ownership of the network itself: a token which is quite broadly earned and owned (in contrast to VC funded corporations). There are various models for governance, inflation, etc. So how to pick winners and losers? Should you even try?
Someday, the world is going to look back on 2017 the way I look back at 1995. Because the tech and other protocol innovations of blockchains are profound.
It’s an exciting time again to think about how entire industries will get digitized by the Internet.
Thanks to Ted Wang, Mike Tatum, Sam Shank, Tom Melcher, Jack Herrick, CJ Reim, Andy Bromberg, Neil Ashe, and Narendra Rocherolle for reading an earlier draft.
