This is Part I of a draft script from a talk given in Lausanne, Switzerland on 6 November 2018 to an audience of 300 senior leaders from around the world. The response was quite positive, and I share it here. If you would like the talk as a PDF without the slides, please find it here.
Please do get in touch with any questions / comments.
Welcome to the talk
It increasingly looks possible today’s blockchain solutions are precursors to the next iteration of the internet.
Indeed likely a greater diffusion of information technologies into business sectors and human societies. However, I have found little narrative about where we are in that journey.
So my talk today seeks to do that. Share a narrative for senior leaders of non-technology companies. One that helps to put the technology in context of what we are seeing, and also in historical context of how previous cycles developed, and what we can expect to see.
I will caution no two cycles are alike. I do not seek to share a roadmap with you today, but rather a way of looking at this technology and beginning to take opinions on it. A foundation for commercial decisions that will come to pass as the technology industry shifts from its current iteration.
In my view, we’re seeing something that both looks quite similar to previous cycles, whilst also having a whole new set of implications we have not yet had to deal with in the emergence of the internet.
Where do you think we are?
This is a chart of total market capitalisation of cryptocurrency markets from 2013 to present. I ask you to take a moment and look at this figure, and create some impression of it.
What do you think it means? Does it mean anything to you?
Does this represent the emergence of a new technology sector?
Does this represent a shift in the global financial sector?
Or do you think it’s a boom-bust cycle like Dutch tulips or the first dot-com economy?
Please form an impression in your mind. You can write down a word or a few words, and we will come back to that impression later at the end.
A-Ha: Separate the moment of energy generation and consumption
I was decompressing after a conference in Berlin with a couple of world-leading EV engineers. One of them asked what I thought the fundamental innovation in electric vehicles was. An unassailable killer concept underpinning a view of why electric vehicles would eventually win.
“The reason electric vehicles will win,” he said, “is they fundamentally change energy consumption in transportation.
“They separate the moment of energy production from the moment of energy consumption.”
Changing the mobility “protocol”
In an internal combustion engine, the Mercedes, the moment of energy production and consumption are the same moment. Energy is produced through combustion and consumed as work at the same time. That means a few things. First, internal combustion is inherently inefficient. Most energy generated is lost as heat. Secondly, it is difficult to recover excess energy consumed as it cannot be returned from kinetic energy into petrol. Finally, petrol is only available in specific places. It is a molecular combination that has to be extracted from where it already exists.
That last point means energy companies are not necessarily energy companies, but carbon logistics companies extracting crude oil and separating out petrol.
Electricity on the other hand is an energy common carrier. It is produced by a variety of methodologies. Wind, solar, geothermal, hydro, gas, coal, nuclear, tidal. Countries produce electricity by using whatever resource is most abundant — or in combination. Britain favours wind, while Spain favours solar. Iceland uses geothermal and Norway uses hydro.
As Tesla has shown, electrification is step one. One of the greatest innovations about Tesla is not only that it produces electric cars, but also Tesla cars are digital cars. New platforms. As an electric car comes with a variety of new control systems, it is not a huge leap to digitise the entire drivetrain and driving experience.
Other manufacturers have digitised cars opportunistically, and today’s cars have a variety of control systems often provided by outside suppliers. At the heart of the process is an inherently violent and wasteful process of combustion.
As Tesla has an electronic drivetrain at the heart of the vehicle, operations are centralised around a computer system. In effect, a Tesla car is a rolling computer network, continuously generating data and controlling operations within a single operating system. That means the car becomes a platform onto which other features can be developed. Not unlike an iPhone.
This effectively changes the mobility “protocol” and sets up an innovation framework.
The first step is how we do it today. Cars exist, and move people from point A to point B using fossil fuels. Users source fuel from petrol stations.
The second step is how we do the same thing in a different way. Electric vehicles also move people from point A to point B. They use electrons instead of carbon molecules and source fuel from charging points.
The third step is to establish what new things the different way can do. A digital car readily lends itself to autonomous driving. Hence, an upstart car company less than twenty years old now also has the largest amount of real-world autonomous driving data. While Waymo — that’s Google’s offer — has more data, that is in essence research data. Tesla is gathering not only testing data, but also human factor and user experience data.
This may be in part why Tesla is valued at 3.5 price-to-sales, while Toyota is valued at naught point six and Ford and General Motors are valued at less than naught point five. The latter companies make cars that get people from Point A to Point B, whereas Tesla produces an electric, digital autonomous transportation platform.
Also it’s the only car that can become more green after you buy it, as more renewable energy is brought onto the grid. As far as I am aware, no internal combustion engine gets cleaner.
That long answer sets up an innovation framework I would like you to keep in mind for the rest of the talk, as we go through technology adoption cycles and onto the blockchain.
1. How we do it today
2. How to do the same thing in a different way
3. What new things the different way can do
In speaking to non-practitioners about bitcoin and blockchain over the last year, I often been asked to delineate the two. What is bitcoin? What is blockchain? Are they the same? How are they different?
Consider the iceberg is the blockchain, and bitcoin is the part that we can see from here. While bitcoin may have been the first public implementation and use case for blockchains, the implications go far below the surface.
Bitcoin sought to take cash — how we do it today — and move it onto the Internet whilst retaining a number of cash’s key features traditional Internet commerce loses. Instant transactions, anonymity (at least then). The blockchain technology established in the Satoshi paper did the same thing cash does, in a new way — on the Internet.
It is worth differentiating how bitcoin transactions differ from other ecommerce transactions. They may look quite similar. Log into a portal. Determine a transaction or recipient. Enter an amount. Send the transaction.
That is how we do it today. What Bitcoin did was take that dominant logic and user experience and apply a very different back-end processing model to it. In traditional e-commerce and existing online transactions, the user is not sending money online. The user is sending an instruction to a parallel financial system, that will eventually result in money being moved from one account to another.
I think this is a key part of that journey. First understanding what happens today when you make an online transaction.
You enter a credit card number, which goes through a series of processors until it arrives at a regulated bank account. In that moment, money is taken out of that account, and moved into another account. Everything between you, the digital vendor, and the bank are layers of middleware. These layers do amazing things. In fact, the plumbing of ecommerce is incredible. Not dissimilar to German or Japanese internal combustion engines, which are themselves near works of art.
The ecommerce process is fantastic. You can take a Visa debit card from Barclays bank in London, to a village in India, and buy a Pepsi for a dollar. And there is infrastructure which means that transaction takes seconds to verify and execute.
However that is not a financial transaction. It is a complex set of payment instructions that results in a financial transaction.
What Bitcoin and the blockchain it created do is merge payment instructions and the financial transactions, just like cash. Cash is king because cash is a liquid commodity. The moment of payment instruction and transaction is the same moment. Now, e-commerce — and checking before that — was our electric vehicle separating the moment of instruction from the moment of transaction. In fact, e-commerce today is effectively high-speed electronic checking. The system Amazon or any other e-commerce vendor interfaces with today is often bank infrastructure adapted from check-clearing to electronic payments. So really maybe it’s our hybrid car — bridging the worlds of cash and electronic commerce.
And while we can instantly buy a Pepsi in India, there’s a lot of other things that come with this system that are not so efficient, instantaneous, and enabling which I will come to later.
Bitcoin went back to cash, looked at how cash works, and replicated that online. Specifically, solving the double-spending problem. How in a digital system where bits are infinitely and cheaply replicable, can I ensure payments are debited and credited?
There is plenty written about blockchains and trust systems if you would like to dive more deeply into that. I will not cover it here preciously because there is so much discussion about trust that I have little to add to that discussion. Rather I will continue to focus on use cases.
What Bitcoin did was, not only create the blockchain, but also test the blockchain. Keep in mind that we’re ten years into this technology. The Satoshi paper was released ten years ago this week. Why has it burst into corporate and public consciousness in the last twenty-four months?
There was an adoption cycle. If the Satoshi paper set forth the algorithm, that algorithm needed to be implemented and tested. An R&D phase. Much like Tesla, that R&D phase was conducted in the real-world, by real users exchanging real value.
So bitcoin is the part of the iceberg above the waterline. A system for exchanging cash online that has been tested with over a billion, now maybe a trillion dollars of transactions. As we have implemented and tested exchanging basic financial value, the attention of the next wave turns to other kinds of value. Smart contract, identity, data, ownership.
The third step in the innovation framework. What else can the new thing do?
But before we go there, I would like to touch on how we moved from the Satoshi paper about algorithms into production scale use. How a new financial industry worth hundreds of billions evolved without any support from governments or other institutions.
In fact, we’ll see far from being driven by governments, bitcoin and blockchain’s growth has accelerated in value and volume each time government evaluated the technology and chose not to interfere.
The Silk Road: Global business: $0 to $500M in 2 years with 4 parts
The Silk Road is or was the first major, public use case for bitcoin and blockchain technology. It was, quite simply, an eBay for drugs on the Internet. Over two years, it processed over a million transactions, with numbers that look like a successful Internet marketplace business.
Getting there required four components.
The postal service, for delivery.
Tor browser for anonymous websites and communications.
Mt. Gox, for reliably converting US dollars to bitcoin.
Once those three components are in place, immediately after, we get the fourth. A user interface and transaction system for drugs. I will quickly discuss how we go there, and why the timeframes are interesting in terms of blockchain adoption cycles.
First, the US postal service, which was set up in 1775. In fact, until 1900, drugs like heroin were often distributed through the postal service. In the early 1900s, the US went through various waves of prohibition, until today’s familiar drug black market emerged in 1925.
For nearly a century, the US drug trade operated in the shadows of the underworld. I do not have to tell this audience about both the financial and human costs not only of illegal drug consumption, but also the collateral damage from prohibition and enforcement. A reminder that few transactions are solely financial. There’s always tremendous human potential getting economic policy right, and tremendous human cost getting economic policy wrong. These things all appear to be driving the blockchain, by the way.
The second development in the Silk Road story was the Tor Browser in 2006. Tor was developed by the US Navy to help foreign operatives and influences communicate with the Western contacts from places with heavy Internet monitoring and censorship.
Tor is quite a straightforward system in that it takes web traffic, encrypts it, and bounces it around a private network, until the traffic leaves somewhere else. An email about a rally in some country disappears into a nonsensical data stream only to emerge in North Carolina and re-join 2006’s comparatively free Western internet.
However, Tor had a secondary feature key to the development of the Dark Web and the Silk Road. Tor can host hidden websites. Websites that only exist within the Tor network. They have the suffix dot onion, instead of dot com or dot org. These are encrypted websites are hidden in plain sight on other services, however only accessible through the dark web.
A quick note, I do not suggest anyone start a dark web site today in an attempt to make hundreds of millions from a hidden eBay for drugs. Since the advent of bitcoin and the transaction value seen on the Silk Road, a number of tools have been developed for locating Tor users, and also de-anonymising bitcoin transactions. In fact, many of these tools were first developed and implemented tracking down the people behind the Silk Road.
After Tor in 2006, comes Bitcoin in 2009. There is deep social theory on the convergent evolution of many of the solutions if one cares to find out more. And while Bitcoin was a necessary development in 2009, it was not sufficient on its own to manifest the Silk Road.
From Prohibition to Circumvention
It took Mt. Gox, which was a website for exchanging US dollars for bitcoin that launched in 2010. Previous to Mt. Gox, one had the capability to move transactions anonymous over the Internet and US mail, however not the incentive as payments still required operating within formal, regulated financial systems.
Even with the launch of Bitcoin, the Internet gained a native payment mechanism however still without a bridge to real-world money. Mt. Gox launches, and within twelve months so does the Silk Road. The exchange capability necessary to trigger a new kind of digital commerce.
The Silk Road processed $500M of commerce
Based on the price of Bitcoin at the time the Silk Road closed, it had metrics in line with a high-growth marketplace start-up.
1.2 million transactions. 150,000 buyers. 4,000 sellers. Average buyer spent $2,400 over two years. Average seller sold $100,000 in the same time period.
The Silk Road evolved because of American drug prohibition laws nearly a century old. And it did a few things that were extremely important, not only in the development and adoption of bitcoin and blockchain, but also illustrative of opportunities and challenges to come.
Bitcoin represents the first time the Internet, of its own free will, took over an enumerated function of the US government. If we consider one of the enumerated functions of the US government to create and regulate currency, Bitcoin effectively open-sourced that capability across a world-wide decentralised network of largely anonymous individuals.
Hence a shot heard quietly around the world, as Bitcoin launched an unregulated financial tool, and the Silk Road gave that tool its first billion-dollar market. Arbitrage of US drug regulations. Therefor Bitcoin has steeped in its adoption curve not targeting / displacing corporate interests, but government regulation.
I do not have evidence to support this intuition, however consider that in 2010, drug transactions were guys on bicycles in alleys in Seattle. In 2011, the Silk Road makes drug purchases nearly as convenient as shopping on Amazon or any other online store. The product arrives through the mail.
While the Silk Road was shut down in 2013, US drug policy began a series of massive reforms that continue today. Starting with the wholesale legalisation of marijuana for recreational purposes in Western states in 2014. It seems that once US customers experienced the Amazon of drug delivery, they had little desire to go back to alleys and underworlds.
From start, to end of Bitcoin’s first global brand
To create a narrative as to where we are in the blockchain and cryptocurrency adoption cycle, let’s start at the beginning, in 2009, when the Satoshi paper came out. Bitcoin had a volume of zero and a price of zero US dollars.
When Mt. Gox launches 18 months later, the Bitcoin price has moved to seven cents, although volumes are still negligible. There are a few spikes in volume over the next six months as people began adopting and trading Bitcoin.
The Silk Road launches in 2011, when the price of Bitcoin is fifty cents. Already a massive appreciation in value between launch of transaction capability, exchange capabilities, and a real fundamental use case.
Gawker and Wired run articles on the Silk Road a few months after its launch, and the price skyrockets to $31. More importantly, volume also rises substantially. Quintessential example of applying a use case, in this case, a tremendously underserved to the point of being dangerous market, to a nascent emerging technology.
While publicity of the Silk Road builds solid volumes in the market, price doesn’t last and gradually fades However price and value are quite different, as the Silk Road is processing half a million dollars of transactions a day and racking up commissions from that.
This is a first lesson to watch volumes of cryptocurrencies more than prices. A heuristic seen here that adoption of Bitcoin as a transaction product looks like low price and high volume.
A year later, in 2012, a paper leaks from the FBI investigating black market cryptocurrency transactions. That brings new attention to the market and reflects in a gradual increase in price, however a substantial increase in volumes. In the four months following press around the FBI investigation, Bitcoin trading increased from circa $50,000 a day to circa $200,000 a day.
A quick note, please don’t quote me on these numbers. They are indicative only to illustrative the innovation framework rather than be a reference for financial trading. If you want to get into trading bitcoin, you’ll want more accurate numbers than is on these slides.
As daily trading values rose, American start-up Coinbase launched. If Mt. Gox was a halfway house between the dark web and regulated global financial markets, Coinbase was a fully-regulated equivalent. Backed by prominent Silicon Valley firms.
They likely saw the move of the market from thousands of dollars a day to hundreds of thousands of dollars a day, along with the Silk Road proving a use case for the technology in a multi-billion (maybe trillion?) global market.
Coinbase launched when the Bitcoin price is $10 and volumes have tripled again. US regulator FinCen announces it sees Bitcoin as a currency, not a security. The market remains a bit volatile over the next few months until the Silk Road is shut down.
The first version of the Silk Road. Big markets end up living two or three times.
Over the life of the Silk Road, global bitcoin volume grew from the low thousands to 60,000 transactions a day. Price rose from fifty cents to 200 dollars.
Did other uses exist for Bitcoin and help drive this growth? Absolutely. The Silk Road was by no means the only use case and may have not been the most popular use case. However, it is undeniable that it was a global use case that proved Bitcoin’s capability to exchange value over the Internet, in the volumes and with the reliability necessary to support a half-billion-dollar global brand.
Peak ICO: Beginning of end, or end of beginning?
After the Silk Road shut down, the Bitcoin price sat largely stable, sometimes growing until the Bank of Japan official recognises cryptocurrencies as real money in 2016. A big step, from the US saying what cryptocurrencies were not — securities — to the Bank of Japan saying what they were — money.
Over the next two years, prices rose until the bitcoin peak at $20,000 per Bitcoin in January 2018. Since, they price has retrenched to $6,000.
Now the question. What does that mean? Does it mean it happened and now it’s over?
Price declining by 65% in a matter of months may look like a crash, however what happens if we remove price and focus on volume instead?
Market volume consistently growing over ten years
While price has come down from $20,000 to $6,000, volume decreased by 30% — less than half the drop experienced in price. This may look like two years of lost gains in volume for Bitcoin. So early in its lifecycle, that may look quite bad.
It excepts the other currencies launched since Bitcoin. Together, the top 3 cryptocurrencies have gone from an average volume of 200,000 units a day in 2016, to nearly 1,000,000 a day as of 28 October 2018, last week.
Looking at Bitcoin price from a short-term speculation lens, it looks like we’ve lost a huge amount of value. From a long-term speculation lens, huge gains have been made, keeping in mind it was at $200 in 2013 when the Silk Road closed and is now at $6,000 after losing sixty percent of its value.
From an adoption lens, cryptocurrency volume is up 500% in the last two years. And more importantly options are proliferating. I’ll now review blockchain adoption from both price and volume perspectives, and attempt to place them in a relevant historical context.
Again, this is not information I would trade with. Rather, my goal is to continue to build an intellectual framework for senior leaders to evaluate technology trends and make related investment decisions.
Is blockchain a thing or not?
I would like to return to price briefly and put the price form in context. This is not a deep technical analysis, rather a visual comparison between price movements.
The thesis of this section of the talk is that regardless of price, what bitcoin as the first use case for the blockchain did, and is doing now, is build tools and infrastructure underpinning future markets. We start by looking at financial markets to make a case for the coevolution of infrastructure and use cases.
We will then move to look at where we are in the infrastructure development cycle in the context of previous infrastructure. Previous infrastructure that I think we can all agree has changed our lives in a rather short amount of time.
US stock market = high volatility in early adoption
Looking at the US stock exchange prices on the left against the price of bitcoin on the right. We see a similar pattern from earliest records in the early 1900s through the crash in 1929. A long period of early adoption followed by a massive speculation bubble and subsequent price collapse. The shape of price escalation looks striking similar, as does the decline.
Also note that subsequent to the price collapse, there is a slow rebuild of price over time. In fact, the market remains relatively flat for nearly a generation, in absolute terms.
To me, this looks like the development of new financial tools, the stock market and the DJIA. These are financial technologies and would have at the time represented cutting edge innovations. They have all the hallmarks that we have already seen in the Bitcoin market. Use cases leading to tool development. Tool development leading to volatility. Volatility leading to regulation. Regulation leading to recovery and expanding markets.
In fact, by the mid 1960s, the end of the top left graph, the market has expanded nearly 10 times since before the crisis. One could have bought into the peak of the 1929 market, and a generation later still have returned over 200%. Similarly, if one bought at the depth of the crash — at 50 — financial gains would have been 2000%.
Moving to the bottom graph, which is price through present, the stock market now nears 27,000. The entire 1929 crash in context is a mere blip in price.
To counter any early criticism, I am aware of the limitations of this comparison. The two financial tools are based on fundamentally different things. The stock market being predicated on corporate value and earnings over the great American expansion, and Bitcoin essentially having no underlying components or value. As mentioned, my intention here is not to compare the function of the tools, but rather to compare the behaviour of markets through cycles of use case, and infrastructure development.
Similar teething problems vs. pricing reality
To expand the comparison, on the right we see another financial market, the Shanghai Stock Exchange, and Cisco systems. In both cases, there were bubbles and subsequent price collapses. However, it would be difficult to argue in either case we are not seeing adoption of new financial instruments.
In the former case, a new Chinese equities market, and the latter case, the equity price of an individual company. In each case, we see a similar shape to the Bitcoin price. Also, in both cases, there are flat bottoms to the price collapses. Prices peak, and then retrench, indicating each market has real value — real use cases.
In testing this talk, one of the first comments was to show what the price looks like of things that collapse and don’t recover. So, on the right are Snap and Groupon. Both private company that went public, and subsequently collapsed. While the case can be made that these equities had prices before they were public, and those prices may look similar to stock market bubbles, those were private markets. Whereas Bitcoin has always been a public market.
In fact, a feature of Bitcoin pricing is that it’s tremendously transparent.
Peak and fall to zero (GM, Bear Stearns, Enron, Worldcom)
Another comparison is to large cap stocks that peaked, often along with markets, and then collapsed. On the left we have GM, Bear Stearns, Enron, and WorldCom. On the right we have the Bitcoin price.
Here what we see is that when instruments collapse from peaks, they often descend all the way to zero. In each of these cases, the instrument never found a bottom, a new market price, but rather peaked and fell to zero.
That is not what we’re seeing with the Bitcoin price, which seems to have found a stable market around $6,000 for the moment.
The closest comparison may be Worldcom, which peaked and then found a brief period of stability before eventually falling to zero. As Worldcom was also in the business of internet infrastructure, that infrastructure makes for an interesting case study.
Fibre development, from 1998–2002
One of the great drivers of the Internet as we know it today, everything from Amazon to Uber, was the great fibre bubble of 2000. Fibre optic cabling connects computer systems at very high speed. Fibre optic backbones crisscross the world and form the Internet itself.
In 1997, as broadband launched in OECD countries, fibre optic cable was needed to carry the content of an exploding Internet. Or so it was thought.
In a very short period, the market goes from proclaiming fibre is the future in 1998, to literally running out of fibre optic cable in 1999. Several companies in the United States raised huge volumes of investment and began to lay fibre optic cable around the country. Worldcom was one of the companies that bought up rights along railroad tracks and began installing fibre cable.
These cables were divided into two categories. One called dark fibre. Fibre optic data capacity which was not necessarily needed today, but would come into use as Internet volumes continued breakaway exponential growth. Dark fibre is relevant as it represents the latent value of infrastructure. A good question is latent value of today’s blockchain infrastructure?
That growth did not arrive in 2001, rather the Internet bubble began deflating, taking the fortunes of the fibre companies with it. Worldcom’s share price crashes from $65 in 1999 to $20 in 2001.
By 2002 — less than five years since fibre was said to be the future, there’s too much fibre. It’s sold off in a national fire sale and Worldcom’s share price falls to $0.
Fire sale reduces price 66%, demand begins building
Looking at the transit price of data on the top right, the fibre boom managed to reduce data costs from $1200 in 1998 to $600 in 2000. That wasn’t enough. At the time, the industry said there was too much fibre and that caused the bankruptcies. The reality was there was tremendous demand waiting, but the price of bandwidth was too high.
Bankruptcies allowed the market to find the right price, which happened to be a decline of another 2/3rds. By 2005 when YouTube launches, bandwidth is $100, down from $1200 less than a decade before. Once price achieves that level, a new boom begins.
On the right, we have a timeline of broadband adoption in the US and Korea. Similar to the Silk Road, one of the early use cases and market proof points for broadband demand was the launch of Napster in 1999. Napster was a service which created a worldwide searchable database of mp3 music files on user’s individual computers, and enabled sharing of those music files with everyone else who had the Napster programme.
Napster had 1 million users in 1999, 30 million users in 2000, and 90 million users in 2001. It was shut down om 2002, two years after launch. Similar to the Silk Road.
Similar to the Silk Road, Napster was an illegal peer-to-peer service that bypassed government regulation and revealed a multi-billion-dollar market.
Before Napster, most web services were optimised for dial up modem connections. Users connected, found what they were looking for, and then disconnected. Broadband penetration was 0.8% of the market, up 0.6% from two years earlier.
Two years after Napster, broadband penetration sat at 4.4%, an increase of 3.6% from two years earlier. While broadband improved the user experience of other services like AOL, Google, and Yahoo, it was required for Napster. While the first benefit of broadband was pitched as “always on” connections, the Napster use case was not only an always-on internet connection, but also unlimited bandwidth to consume the world’s music library.
In both 2002, the fibre industry went bankrupt, and Napster went dark. But a genie of sorts was out of the bottle. Napster drove fibre optics installation. Fibre installation decreased bandwidth prices. Bandwidth cost reductions drove Napster adoption. Now, all around American huge volumes of fibre optic cable, cheap bandwidth, sat installed. Broadband penetration continued to grow, and broadband prices continue to fall.
Until the launch of legitimate services like iTunes in 2003, YouTube in 2005, Netflix On Demand in 2007, and Spotify in 2008 began consuming all of that cheap bandwidth.
The comparison to cryptocurrency is the following. Napster was enabled by the mp3 format. A high-quality, highly-compressed data format which meant CD quality audio could easily, nearly instantly, be traded across broadband connections. Napster was a P2P service which provided a UX to those MP3s.
The Silk Road was enabled by the Bitcoin protocol. A P2P online version of cash, which meant value could be traded instantly, securely, and anonymously on the internet. The Silk Road was a P2P service which provided a UX to reliable drug transactions using Bitcoin.
In both cases, technology met a use case, which drove infrastructure development and deployment While the initial infrastructure did the same thing in a new way, once the illegal services shut down, the infrastructure was left behind. Often written off in devaluations.
Then, new legitimate use cases emerge. While impossible to compare timing of the broadband industry and cryptocurrency adoption, we can look at how services emerged across the broadband horizon. Perhaps that helps locate us in understanding where we may be in blockchain and cryptocurrency adoption cycles.
Fibre sale breaks business models
Looking at the revenue of the American music industry, it peaks in 1999. The same year Napster was introduced. Over the course of Napster’s operations, music industry revenues dropped 25% from $20B to $15B. We do not yet see new revenue stream emerge over this time period, as Napster exists as a free service outside a formal market.
Simultaneously, we do see the internet bandwidth price collapse, leading to, and stemming from, the fibre industry’s bubble and subsequent bankruptcy. Finally, on the bottom, we see global internet traffic, which over the period explodes. Hard to tell given the scale of that chart, but the numbers are on Wikipedia if you want them.
With the launch of iTunes in 2003, a new business model emerges to take advantage of broadband and MP3 technologies. Here, music industry revenues briefly stabilise. Although once iTunes’ track-based business model takes hold, music industry revenues go into a freefall again as new distributors like Apple flex control.
By 2013, inflation-adjusted music industry revenue is 1/3 of its 1999 peak, with digital business models supplanting traditional formats.
Exponentially growing data consumption; mobile = 7% of data traffic; growing 200% faster than broadband.
The last section covers the period from 1998–2007 approximately. From the introduction of broadband, through the emergence of high-bandwidth services like iTunes, YouTube, and Netflix On Demand.
In terms of adoption, that takes us from 0.3% broadband penetration, to 25% broadband penetration in the US. Please keep the former number in mind as we continue.
That is the early adopter phase of the Internet as we know it today. Web v1.0.
In 2007, we get the iPhone, which represents the next iteration of the Internet, Web v2.0. There is a fundamental difference that happens with the iPhone in 2007. Apple launches the world’s smallest portable computer. Since the introduction of the iPhone, global internet data has begun to exponentially multiply. On a separate point for the 5G session later, mobile data is still only 7% of global data.
There are a few points to mention about this, before returning to blockchain and the crypto markets. The first is that since Apple’s introduction of the iPhone, mobile data has grown 200% faster than broadband over the same time period.
iPhone released when US mobile penetration = 95%
There is a neologism in technology that Apple likes last-mover advantage. It adopts technologies later than other brands, however it works to perfect them.
The graphic user interface for PCs was not the first UX for desktop computers, but it is likely the last one. The current transition is to voice, which obliviates the PC, meaning the GUI both Mac OS and Windows use is an evolution of the one Apple introduced in 1984.
The iPod was not the first MP3 music player, but it was the last one. As music players faded into obscurity once Apple added a keyboard and data modem to the iPod.
Apple launched the iPhone when US market penetration of mobile phones was 95%, and global penetration was 50%.
Last mover: iPhone launches into full market
In terms of the innovation cycle, the iPhone launched when the phone had been fully evolved. Going back to the innovation cycle, the mobile phone took all the functions of a telephone and added location independence. Literally, a phone untethered from a specific location.
Early mobile phones allowed users to do the same thing, make phone calls, in a new way, from any location where there was service. For most of the mobile phone’s innovation cycle, it was refining that offer.
Motorola shrinks the phone from a luggable object, to a hand-held object in 1983.
Then the Nokia. Reducing the size and price further to create a mass market consumer object.
Then Blackberry takes advantage of low-speed data services to add email to phones, coming up with the killer app. That app began merging mobile phones with computers.
Finally Apple comes along into a full mobile phone market, and introduces the iPhone. The next step in innovation, what else can the new way do?
Today, cryptocurrencies have .003% to .03% global market share.
20M wallets by those made, about a tenth of that by those active. By comparison, that puts us at roughly 1983 in terms of mobile phone development. The Motorola handheld.
Or 1995 in terms of global internet users, or 1998 in terms of US broadband users.
In 1998, Google was based in a garage and the average internet connection speed was 30k per second. It would take 30 minutes to download today’s average YouTube clip.
For context, in 1983, Motorola’s mobile phone weighed a kilogram, took 10 hours to charge, and had 30 minutes of talk time.
Cryptocurrency market volume consistently growing over last ten years
The past ten years of cryptocurrency development has moved the Bitcoin price from $0 to $6,000 per coin. Market adoption is .03%, which puts us in roughly the same place as the Motorola portable phone.
This has been the value of doing the same thing people can already do, transferring money over the Internet, in a new way. Using blockchain-based back-end systems.
3 blockchains; compounding global volumes
While today’s blockchain solution will feel infinitely more advanced than Mt. Gox and the Silk Road, we must keep in context how powerful the Motorola cellular phone was upon its release and subsequent adoption. Or Napster emerging into a nascent broadband market.
Today, we see that Bitcoin makes up a minority of transactions by volume on blockchains. Because it has the longest history, greatest adoption, and price is the highest, it seems like an obviously benchmark.
Both Ethereum launched in 2015, and Ripple, launched in 2016, show greater volume of adoption already. Further, as with Nokia and Blackberry, we see the new entrants substantially diverging from the market leader.
Ethereum: Open blockchain launched in 2015
The Ethereum project launched in 2015, substantially evolving from Bitcoin. Key to Ethereum’s development are smart contracts. Smart contracts allow for tokens. Tokens can be anything, from simple brands with no other underlying value, or represent actual objects in the real world.
Looking at this graphic, the grey dots are financial transactions and the yellow/orange indicate other kinds of smart contract executions. Already we see the Ethereum ecosystem evolves as a value-exchange ecosystem rather than a version of digital cash like Bitcoin.
Please keep in mind as you watch this. This is a sample of Ethereum network operating in real-time, as recorded last week. The blockchain can be quite an abstract concept, however I feel this makes it more real.These are actual transactions of money, contracts, and value being processed by a worldwide network of computers with no central brand or controller.
There is little regulation to these transactions. They occur in every country where Ethereum protocol traffic is permitted, 24 hours a day. This is the first “picture” some of you may have seen of the global decentralised financial network.
XRP: Permissioned blockchain launched in 2016 and positioned as a global currency
If Ethereum is open, like Linux, Ripple and XRP are permissioned blockchains. In Ethereum, anyone can run a node, and anyone can compete for mining rewards.
In sharp contrast, Ripple runs XRP. The XRP blockchain updates once a second. This is what a transaction looks like. As you can see, the blockchain is closed and transactions are open. The next step in a global decentralised financial network.
Ripple is a cloud service provider offering global financial exchange as a service. All transactions are transparent. Although most importantly, while you know what went on, you do not know who transacted what. Security services may likely know, however to the casual or even advanced user, there’s a relatively high amount of privacy.
Binance: 100 tradable assets on a 24x7 decentralised platform launched in 2017
This is one of the most popular ways to trade Ripple today. Binance is a decentralised exchange launched in 2017. In the last year, it has become one of the most popular places in the world to trade cryptocurrencies and related tokens.
Binance, a one-year old trading platform, now, at the low point of the 2018 crypto crash, trading between $750M and $1B dollars a day.
Also, please keep in mind, this is the state-of-the-art B2C user interface. Financial trading platforms as you see for stocks and bonds. These have existed in private financial markets for twenty years.
Binance now allows us to do the same thing — trade value via a familiar online interface — in a different way.
Blockchain today = basic infrastructure for early adopters
Putting blockchain and bitcoin in context of other innovations, over the last ten years, we have moved from R&D to market tests, to early adoption.
And in my view, that is where we are today. We have a 1kg phone that lasts for 30 minutes of talk time. Or a 1mb broadband connection that allows us to listen to music on-demand.
The next big step is in use cases and user experience. Binance works as a financial trading platform, a front-end raw blockchains powering cryptocurrency markets.
This is global infrastructure being developed, and at its peak in 2017, these new markets were transacting — $12B a day, nearly $8.5M a minute.
Most recently, Coinbase announced the Coinbase Wallet. Ostensibly a wallet for holding cryptocurrency tokens. The functional use case may well be the web browser for the crypto currency world.
Summary: Blockchain in 2018
In 2008, the Bitcoin algorithm was released.
In 2012, we had the first market test. The Silk Road, an eBay for drugs, that occupies a similar place to Napster in global broadband adoption.
In 2016, we saw protocols begin proliferating. The emergence of smart contracts, and permissioned decentralised transparent trading platforms.
In 2017, the global cryptocurrency market peaked at transacting $12B in a day — nearly $8.5M in a minute. That was a global effort, involving computer systems around the world, processing transactions on transparent and decentralised networks.
In 2018, Coinbase launched the first mobile UX portal — the Coinbase Wallet.
And that is where we stand at the moment. Global cryptocurrency market penetration sits at roughly the same place is mobile phone penetration in 1983.
We’ve had the location-independent mobile phone moment, and the Napster moment. We may be going through blockchain’s fibre crash. Where prices collapse but volumes quickly recover and begin building.
In the next section, we’ll look at how the blockchain is being adopted beyond cryptocurrency markets. We will also look at early use cases and products.
But before that I would like to begin building a bit of social and societal context. The goal of the next few slides is to begin thinking about where these technologies are going to go.
What are the conditions under which they will develop?
Technology is no longer a single global race, but now a competition between blocs
One of the greatest stories in technology at the moment is the separation of networks around the world. In one sense, we can look at this as success. Global markets are now large enough to support at least three distinct internets.
In 2014, I met in Shanghai with a seed investor in several of China’s leading technology companies, Alibaba amongst them. We discussed China’s technology development, venture capital funding, and pipeline ahead.
I have been working in China since 2004, and seen three distinct evolutions of the Chinese Internet. First from a relatively open system, then to one heavily filtered by the great firewall, and finally to the current iteration as a second, globally competitive ecosystem.
He was curious to know my thoughts on the motivations behind the great firewall. Why had the government adopted such an aggressive approach to the Internet?
I considered the degree of general media filtration in China and responded with editorial control. Beijing wanted to control the flow of information in and out of its borders.
He responded that China saw how Europe adopted US information technology nearly at the same pace as the United States did. And the result that today US companies dominate Europe’s internet services. If Chinese people had been allowed to adopt American internet services as the Internet proliferated, China would have lost control of its internet brands and content.
Further, China would also have not developed the skills, capabilities, and domestic markets that it has as a result of forcing the creation of a Chinese internet.
Great Firewall vaults Chinese VC from European to American levels
Chinese technology VC investment in 2008 was roughly equivalent to Europe in both share and value. Europe and China each took 10%, about $8B dollars.
Today, China deploys 40% of global VC capital, nearly $60B, while Europe’s market share remains about the same despite deployment tripling from $5B to $16B. The latter pales in comparison to the former.
A testament to the financial opportunity (and social impacts) of a regulated Internet.
GDPR begins closing the doors
Today, Europe begins that same journey. With GDPR, a number of American services have become inaccessible. Today, more than 1,000 US publishers block access to European visitors.
Current paradigm shift
This diagram is a substantial simplification and fails to adequately near describe the complexity of the situation. However please do not completely discount it.
The meaning here is the future of global technology and financial systems looks very different from the recent past and present.
As we will see in the next section, blockchain and Web3 are about moving the Internet from transacting information, to transacting value. We already have early examples of that being adopted by some of the world’s largest companies in both the B2B and B2C spaces.
The last ten years of blockchain adoption have shown early demonstrations of how much potential these protocols enable. At scale, few industries will remain untouched as we shift value into protocols and the network layer. Finance moves from a sector of the economy, to a set of protocols and rules.
In doing that, the financial system itself moves from something permissioned and regulated, to something more open. Or extremely open.
Simultaneously, we move from a world of unregulated network access, the open internet, to more regulated environments. China already started this fifteen years ago. Ten years ago it implemented the current system. Today, the country operates a technology environment of comparable domestic power to the US internet.
Meanwhile, in both Europe and the United States, there are separate movements for greater control of the Internet and more regulation of it. In the United States, that looks like ending net neutrality, and allowing a more corporate internet. In Europe, that looks like GDPR and moving data rights to individuals.
Combined with renewed efforts to spark European technology investment, the future looks like networks that are more regulated, not less.
Which combined with financial systems that are more open and less regulated, means as finance adopts blockchain technologies and is absorbed into network layers, we will simultaneously see increasing regulation at the network layer.
Together, we see China, the US, and Europe converging in paradoxically very different places. The opportunity for open financial tools is tremendously great, and to enable mass adoption of those tools, we will necessarily see regulation move to the network level.
Let’s talk in the bar after what that means for society. For now, I am going to carry on with how we get to that world, at least the open finance part of it.
From bitcoins to blockchain applications
Let me call you back to the image of the iceberg. Bitcoin was the progenitor of the blockchain, however we now see infrastructure, use cases, and products breaking off. We see an ecosystem growing at an early, likely exponential rate.
As we’ll see in a moment, much like the leap between pre-Web and Web 1, or Web 1 and Web 2, Web 3 seeks not necessarily to augment previous applications but to replace them.
We already have web browser extensions that operate as Ethereum token wallets. Now we’re looking at Ethereum token wallets with web browsers built in.
I’ll make an early distinction here between cryptocurrencies and blockchains. Cryptocurrencies seem at the moment B2C focused, whereas blockchains cross both dimensions. I’ll cover where we are in the B2C market before moving on to blockchains and B2B developments and use cases.
B2C is the fight for the wallet
The tagline is “all your digital assets in one place”. To which the likely response is “what digital assets?”.
The answer is an even more ambiguous “Exactly”.
The Netscape browser was launched into a market that didn’t have any websites. The iPhone was launched into a market that didn’t have any apps.
The Coinbase wallet is being launched into a market without a real usable cryptocurrency tokens or digital assets, other than cryptokitties, or various utility tokens from an ICO market quickly finding bottom.
This is a case where the medium is the message. The point of the Coinbase Wallet is not what digital assets you have today, it is what assets can be digitised in a world of blockchains and open financial markets.
From the outside, it looks like Coinbase had a bit of a Facebook going mobile moment.
In 2012, Facebook was a desktop company with a desktop advertising-based strategies and revenue streams. In May of that year, Zuckerberg had an all hands meeting and told everyone Facebook was going to be a mobile-first company. The company acquired Instagram in 2012, and then Whatsapp in 2014.
Similarly, Coinbase shuttered its Coinbase ETF offer which sought to replicate institutional fund management products, and relaunched the Coinbase Wallet app. The App Store for all the digital assets that you don’t have, and generally don’t yet exist.
As I go through the next use cases, the reasons for that may become quite clear.
This is the end of Part I: An Anthropology of Bitcoin. Thank you for reading.