Why Cryptoassets are Important
This is not a blog post about the price of bitcoin, ether or any other Cryptoasset. Nor is it a post that hopes to convince you to buy Cryptoassets. Apart from this one, you will find no references in this post to Cryptoassets going “To The Moon”.
Instead, I’m writing this piece because I know a lot of smart people who have read, heard and maybe even at one point invested in cryptoassets, but have failed to embrace them in the same way that I have. This is a post for the Brads, Chloes, Jacksons, Marthas and Wyatts of the world, cryptoskeptics who recognize that Bitcoin is more than a fad, but haven’t made the mental leap to see crypto as a technology that can be used to enable new business models and organizational structures; a technology that can be used to apply previously unimaginable solutions to existing social, political, economic and environmental systems; and a technology that can form a foundational infrastructure layer for the world of the next 100 years in which data is the most valuable commodity and general AI is a part of everyday life.
Cryptoassets are enabling a new era of grand experimentation at the intersection of governance and economics. This experimentation inevitably leads to failures, hype bubbles, and scams, but it also creates the conditions for truly revolutionary innovations to occur. Given the potentially disruptive implications of non-government backed economic and governance systems, it isn’t an exaggeration to suggest that this era may find its closest parallel in the late 18th century, when political revolutions were born and grand experiments in new forms of governance were unleashed on the world.
Let’s dig in.
The OG cryptoasset: Bitcoin
It wasn’t until 2017, 4 years after I bought my first bitcoin, that I decided to finally read Satoshi Nakamoto’s whitepaper. I’m not technical and had always assumed that the paper would be too complicated for me to read. I leveraged the faith in the technology held by some of the VCs I highly respect (primarily Fred Wilson of USV) as my technical due diligence, and while Bitcoin was positioned in my mind as “native internet money” or “digital gold” I never felt compelled to understand its technical underpinnings. I think this is the position many cryptoskeptics hold: “Bitcoin’s functionality may be of interest to computer scientists, web developers, or speculators, but apart from its potential to appreciate in value, it isn’t of too much interest to me.”
Reading the original Whitepaper, however, and seeing how it reads more as a political manifesto than as a technical manual, cemented a change in opinion that had developed over the prior year — Bitcoin may be a technical innovation, but the intended application of this technical innovation is for socio-political revolution.
Bitcoin’s key innovation is the development of a distributed, immutable, cryptographically-enabled ledger, also known as a Blockchain. The technologies associated with this system are relatively simple, but together they elegantly power a network in which independent actors interact with one another in a trustless manner; in other words, the incentives of each party in the network are aligned such that it is in nobody’s interest to be a bad actor.
With Bitcoin we no longer need 3rd parties to vouch for the trustworthiness of anyone we may seek to transact with; with Bitcoin we no longer need a centralized platform to provide us with reviews and feedback as we may find on Ebay, Airbnb, or Uber; with Bitcoin we can just rely on the fact that nobody has an incentive to act falsely or maliciously — the “miners”, who maintain the network by running open source software that anyone can access and run, are rewarded for verifying valid transactions and rejecting fraudulent transactions e.g. attempted double-spending of bitcoin they have already spent. Bitcoin disintermediated the need for trust through well-designed software.
Satoshi Nakamoto’s political intent was evident when he or she designed Bitcoin to apply this technological innovation to function as a new currency with a fixed monetary supply of 21 million bitcoins and a governance mechanism called “proof-of-work.” This mechanism ensures that the people voting on changes to the network are the very people with “skin in the game,” (ie. the people with the most to lose if they make poor decisions), which in Bitcoin’s case is the miners. This stands in stark contrast to the fractional reserve currency system operated by all the major global currencies, in which monetary supply is not fixed but instead determined by a small group of Central Bankers who are elected with a mandate to maintain long-term price stability. While often well-meaning, Central Bankers do not have the skin in the game that miners do — they pay no price for errors of judgement, and are often incentivized to trade long-term stability for whatever monetary policy is politically appealing during their tenure, contrary to their purported mandate.
As a result of Satoshi’s chosen deflationary monetary policy and conservative governance mechanism, which have been upheld, supported, and iterated upon by miners across the world, Bitcoin has emerged as an effective store of value for those at risk of poor central bank policy, and as a decentralized global currency controlled by no centralized government, institution or corporation. In countries where currency devaluation is a reality (Venezuela, Argentina, Turkey, Iran, South Africa and more…) Bitcoin can be a lifeline; in larger currency markets Bitcoin’s deflationary nature can serve as a hedge against possible inflation caused by a global rise in populist-nationalism and nascent trade wars, and the long tail consequences of the unprecedented actions taken by Central Banks in the aftermath of the 2008/09 financial crisis.
You may have heard that Bitcoin miners use a huge amount of energy to maintain the Bitcoin network, and you’d be right, but that is a feature, not a bug, and it protects the network from attack more effectively and efficiently than other currencies. The value of the Dollar, Euro and other currencies are no longer directly tied to a physical asset (e.g. gold), and are thus ultimately only as good as the word of the governments that back them, which in essence is reflected in their military might. Bitcoin’s “Proof-of-Work” mechanism instead requires miners to expend energy (in the form of computers running energy-intensive algorithms) to “prove” that they have done the work necessary to maintain the network and therefore be eligible to receive their Bitcoin reward. This incentivizes miners to expend more and more energy-intensive computing power maintaining the network, to the point where today the Bitcoin network is estimated to consume the amount of energy used by Ireland. As a result, a potential network “attacker” who would seek to alter the Bitcoin ledger, potentially to move Bitcoins into their own wallet, would need to possess enough computing power to equal 51% of the network’s total hash rate, which at this point is virtually impossible for anyone but perhaps the Chinese or US government. Today’s Bitcoin network is extremely secure, because of the network’s large computing power consumption.
Furthermore, given that the largest expense in running a Bitcoin mining operation is the cost of electricity, it is rational that over time miners will power their operations with the cheapest form of energy available, which even today is usually clean, carbon-free energy, and in the near term will inevitably be renewable energy. And when all mining operations are powered by carbon-free energy sources, we will be using algorithms to convert sunlight into a secure global currency. Much more efficient than relying on political will and defense spending.
And, unlike holding money in a bank account, if you possess and secure the private keys to your Bitcoin then that asset is 100% yours and no one can take it away from you.
Bitcoin’s ability to provide independent financial sovereignty to anyone in the world with a smart phone is a political revolution. As Nicholas Nassim Taleb puts it:
“Its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.”
Currencies, Networks, Commodities, Security, Utility & Non-Fungible Tokens
Satoshi Nakamoto’s application of the Blockchain technology created Bitcoin, but the revolutionary nature of software that can disintermediate the need for trust has spawned thousands of projects which leverage this new “technology primitive” to build all kinds of different cryptoassets. I’m sure you’ve heard of many of them, and I won’t list them out here, but it is worth noting how different the applications and underlying monetary and governance mechanisms can be.
In terms of applications, some cryptoassets have attempted to emulate Bitcoin’s goal to be a functioning currency but with different (usually more inflationary) monetary policies or with more advanced privacy technology. Some cryptoassets are building decentralized computing platforms on top of which other applications (in cryptoland referred to as “smart contracts”) can run, with a goal of building out a Web3 technology stack that doesn’t fall victim to the same centralizing tendencies exhibited by our current internet ecosystem. Cryptocommodities, like the real world commodities from which they take their name, are designed to represent a specific function e.g. storage on a decentralized hardware storage network, accessible by anyone who owns the cryptocommodity.
Then there are security tokens, utility tokens, and non-fungible tokens (ie., tokens that are unique). These cryptoassets are labeled as “tokens” due to their nature as applications running on top of a decentralized computing platform such as Ethereum or Dfinity. There is an incredible breadth of uses for these tokens. Some are attempting to “tokenize” real world assets or shareholder equity in order to provide the benefits of transaction history and increased liquidity provided by the market for tokens on a blockchain. Some projects are selling tokens that will ultimately have utility in the end product they are building, conducting an “Initial Coin Offering” as a way to fundraise and kickstart a network of potential end users from day 1; other projects are leveraging the verifiability of the blockchain to create provably scarce digital assets attached to “non-fungible tokens” which can accumulate value in the same way that art or collectible baseball cards can.
It’s breathtaking to see the speed at which the experimentation is taking place. While there are only six major international currencies (USD, EUR, CNY, JPY, GBP, CHF), and less than a handful of legally recognized corporate governance systems (Sole proprietor, LLC, LLP, Corporation), according to Coinlore there are now over 1,600 active cryptoassets, each with its own intended application, form of monetary supply and governance mechanism. We are all witnessing an evolutionary market develop in real-time for governance mechanisms and monetary policy as best practices are shared and iterated upon, with market prices serving as a voting mechanism as to their efficacy.
Solving the Tragedy of the Commons
It is this explosion of applications uniquely enabled by the blockchain, and the corresponding experiments in governance and monetary policy, that excite me.
In particular, I’m excited about new types of business models and value creation that can emerge from these innovations. Many problems facing modern societies are due to a “tragedy of the commons” effect, where individuals acting in their own self-interest collectively abuse shared resources, resulting in negative externalities that impact the entire community. Think: traffic jams caused by too many people driving individual vehicles instead of taking public transport; education being perennially underfunded because the benefits to taxpayers are large in aggregate but small on an individual basis; “Wonders of the World” losing a lot of their wonder and actually being damaged due to the presence of millions of tourists.
On a small scale where there is trust between participants, the tragedy of the commons can be overcome. Informal agreements can be made between parties who know one another, with trust as the factor that enforces the agreement. Co-operatives can be hugely successful up until a certain scale, benefiting all parties involved. However, on a larger scale, the incentives to cooperate are lower than those to act in your own interest. Cryptoassets can “solve for trust” by building rules for commons-type systems that can be implemented and enforced at scale by network participants who are rewarded for maintaining a healthy ecosystem.
As Mike Maples Jr concludes in his excellent piece Crypto Commons:
“Satoshi’s white paper shows how to leverage mass computation and connectivity to create ‘governance markets.’ Governance markets allow the commons to scale and create abundance in the same way that the stock markets enabled corporations to scale.
‘Governance’ markets? Why would people want to buy and sell governance? Because Blockchains create the first medium for people to be rewarded for enforcing decentralized “governance” at scale, and users of the commons will require ownership of the Cryptoasset in order to participate.
In the not-too-distant future, a new form of networked governance will allow new types of value creation with crypto assets rather than shares of stock, contributors rather than employees, and decentralized collaboration rather than centralized ownership.”
One interesting real world application of this concept is through the use of Token Curated Registries, a self-organized White List where a group of people or organizations can create value for a token that each member owns by maintaining a high set of standards to the point where other people or organizations will pay application fees to try and be a part of the list. As more people apply it pushes up the value of the token, incentivizing more people to apply, in a virtuous cycle. I highly recommend this read on the topic by Ryan Selkis, founder of Messari which is leveraging the concept to weed out bad crypto projects from the good:
A token to self-regulate tokens. But really.
After six months of thinking through issues surrounding data transparency and disclosure standards in crypto, I’ve…
Solving for the tragedy of the commons isn’t the only new type of value creation that is uniquely-enabled by blockchains. I am personally very interested in businesses that can leverage the ability to easily issue tokens based on a set of pre-defined rules to provide opportunities for employees and customers to earn equity through participation over time, thus enabling a decentralized investor base comprised of a more representative group of stakeholders.
Leveraging Cryptoassets to solve problems and build a better future
But that is just one potential application uniquely enabled by Cryptoassets.
Bitcoin and all other Cryptoassets represent a new form of technology, and now that the technology exists there is no putting the genie back in the bottle. Like all technologies, Cryptoassets are tools that can be used for all sorts of applications, agendas, and ideologies. The purpose of this post is not to provide an exhaustive list of potential applications for Cryptoassets, but to convince you that you should care about them because they are relevant to your passions and goals.
Just a few of the topics that come to mind when I think about applying blockchain technology to the real world:
- personal privacy in a world of AI-powered algorithms
- stabilizing, managing, and incentivizing the development of an energy grid powered by clean energy
- strengthening property rights and providing more liquid markets for traditionally non-liquid assets
- building a better welfare system or a universal basic income to reduce inequality
- counteracting the spread of fake news and reducing the risk of voting fraud
- banking the unbanked
- eliminating tax evasion and increasing transparency about the role of money in politics
- providing censorship-resistant means of communication and exchange to citizens in oppressive regimes
- prediction markets for everything, accessible by anyone
- building a truly inter-operable digital economy for gamers where provably-scarce digital goods can be built and exchanged across games and platforms
- creating personal digital assistants owned by us, not Apple or Google, which can interact with both the digital and real world
- reducing the threats of centralized platforms
- building a more robust and open financial sector
I have learned an insane amount over the past 2 years by following, reading and listening to smart people in the area. If this post has encouraged you to dip your intellectual toes into the sector, I have 4 suggested things to do:
- Buy $10 of Bitcoin and move it from an exchange into a personal wallet. I recommend buying on Coinbase or the Square Cash App and moving it to a personal wallet (here’s a list of the best). If you want to buy some of the different Tokens, you can transfer your Bitcoin to a wallet on Binance and exchange them there. There is nothing like owning a Cryptoasset to make you more interested in the ecosystem.
- Skim read the Bitcoin White Paper in 10 minutes or less. Much of it is easy to understand even for non-technical people such as myself, and you can see how a $130bn currency is articulated in 8 pages.
- Listen to this 1 hr 5 minutes Unchained podcast episode with Chris Dixon which focuses on Trust, potential Crypto applications, and current obstacles to success.
- Talk to me about it! There are hundreds of interesting questions and sub-topics about crypto in general and individual Crytoassets specifically. Dialogue is the most efficient form of conveying information, and I’m more than happy to invest a couple of hours to get into the nitty gritty with you :) I’m not an expert by any means, but I’m relatively well read and well versed, and would like to put what knowledge I have to good use.
I’ll leave you with a quote (classic Medium post):
“If you don’t believe me or don’t get it, I don’t have time to try to convince you, sorry.” — Satoshi Nakamoto
Thanks for reading!