Bitcoin’s role in the Internet’s evolution
Bit-thoughts #2
Understanding Bitcoin’s place in the history of the Internet is useful if we want to form an understanding of where cryptoassets are going and what their future value might be.
The Internet is an abstract concept. It refers to the capabilities of networked computers using standardised communication protocols. For example, the transmission control protocol (TCP) defines how a computer assembles data into smaller packets to be transmitted and then reassembled in the right order at the destination computer.
The Internet is not just one protocol. Rather, it is a suite of protocols which enable networked computers to perform a variety of end-to-end processes. Most Internet users experience the Internet through application layer protocols that enable higher functions, such as web browsing, file transfer, email, web chat, etc.
Why is it built in layers? It is very hard to achieve the network effect of computers around the globe all communicating in the same language. But that same network effect, once achieved, causes established protocols to become ossified and difficult to replace.
Innovation and the evolution of the Internet are based on building layer upon layer onto this Internet protocol suite, providing new capabilities over time for the global computing network.
My mental model of how the Internet has evolved to date through developments in software and hardware is as follows (better Internet historians than I, please feel free to comment!):
PCs – hardware – by the 1980s, it was possible to have a computer in every home. The PC, however, had yet to find its killer app and there were doubts it would be needed.
World Wide Web – PCs became networked, allowing users to share data and communicate peer-to-peer. This enabled email, chatrooms and web browsing.
SSL (secure sockets layer) – the addition of encryption to websites made eCommerce possible and gave rise to Amazon.
Web 2.0 – JavaScript programmability in the browser made webpages dynamic. Instead of just consuming content, users could now easily interact and create content themselves. Social media emerged.
Mobile – hardware – easy accessibility of mobile devices and touchscreen user interfaces increased the user base and screen time. Additional embedded hardware of cameras and location tracking made it possible to develop new applications.
Bitcoin and other cryptoassets are just another set of standardised protocols that enable new capabilities – the creation and transmission of digital scarcity or value.
It has taken decades of research to reach this point. The idea of digital cash was first publicly conceived by David Chaum in a 1983 paper. The original HTTP specification, developed in the 90s, even contains an error code called 402 which was intended to be used as part of some form of digital cash or micropayment scheme that was never developed.
And here is Milton Friedman predicting Bitcoin in 1999…
Over the past 25 years, the Internet population has grown from a few million to a few billion. There are now enough economic participants in the virtual economy and sufficient critical mass to begin to make use of virtual currencies and assets.
Bitcoin is a successful proof of concept that digital assets and value transfer processes can now natively be part of the Internet protocol suite itself. An individual (or even a machine) can custody their own assets and transfer them directly (peer-to-peer) to another individual (or machine).
One innovation of Bitcoin is that a unique string of 256 bits of data…
… if in your possession, will allow you to solve a mathematical puzzle to transfer a fraction of the limited bitcoin reserve you own to another participant on the Bitcoin network. To begin with, these fractions were just passed around other participants on the network as a hobby – like early email users messaging each other for no other purpose than the fact that they were the only few users on the network. After a couple of years, they were accepted for goods & services (most famously a pizza). Today, there is a significant market of people willing to pay fiat currency to be part of that network, giving bitcoin its store of value property.
But is it Internet money? Exactly what way and to what extent this new capability will actually be leveraged is still open. What we can begin to appreciate though is that a new capability for networked computers has now been established and it opens up a new field of possible applications.
For example, the current model of digital payments is a complex workaround, leveraging legacy banking and payment infrastructure. Although it technically allows Internet payments and banking, it is unnecessarily complex and restrictive compared to how the Internet works. Instead of eCommerce happening like this…
… Bitcoin allows it to happen like this…
Bitcoin might eventually disrupt the legacy banking infrastructure, but first consider how it will evolve the purely digital environment of the Internet.
Commentators often get stuck on whether Bitcoin has sufficient characteristics to replace money in the way it is currently used. This misses the point. Crypto allows money and value to be created and used in different ways than was previously possible. There is now the possibility of a new parallel Internet economy, similar to the difference between commerce and eCommerce, sports and eSports.
Bitcoin and other crypto protocols provide the tools for developers to create virtual goods and services more appropriate for the open, digital, peer-to-peer and programmable environment of the Internet.
Open – because no-one needs permission to participate in or build on the network. Leveraging the community of open-source developers greatly increases the chances of innovation occurring. It is just code.
In the early days of the Internet, big telecomms companies tried to limit user access to the Internet to content they provided in walled gardens called the “information superhighway”. However, because the Internet was open, no-one needed permission to create new websites and services or to access them – and that is what happened. In the same way, no-one needs permission to access digital assets or innovate around them – it is just happening.
Digital – crypto is machine readable and ownable. Interoperability with software and hardware make it native to the Internet architecture. Machines can own assets, know who owns what and transact directly.
Peer-to-peer – users can transact without middlemen or gatekeepers. This greatly reduces friction in transactions and implementation. Direct peer-to-peer transmission also allows networks to spread like a virus. I love this visualization of how the Bitcoin network spread in the first few years:
Programmable – this is possibly the most important characteristic. You can make your money or your assets do things and interact with other software. You can build with it. For example, Bitcoin already has a few ways to programme your money with code that would normally require complex legal processes:
- MultiSig – requires multiple private keys to unlock a transaction, allowing enhanced governance and security features.
- Time lock – restricts the spending of bitcoin until some specified future time, effectively providing the function of an escrow.
It doesn’t stop there. Higher level crypto protocols, such as Ethereum, are already taking this programmability further and beginning to demonstrate game-theoretically sound incentivisation schemes to economically secure new types of Internet applications, such as a shared global computer.
Limitless possibility
The Internet is virtual. It is not bounded by the restrictions of the physical world. The only limit is human imagination. Thus, the Internet is never finished. It keeps evolving.
The permissionless programmability of globally accessible digital data allowed the creation of Google, Amazon, Facebook, Uber, AirBnB, etc. They created new capabilities and behaviours which were previously difficult concepts to accept. The same permissionless ability for developers to programme digital assets will again very likely create new capabilities that are currently difficult to imagine. It is already inspiring a new wave of evolution in the development of the Internet.
If I were to refresh my brief history of the Internet in 10 years’ time, I can imagine myself appending:
Crypto – Allowed the creation of virtual economies natively built on the Internet.
Bonus level
I appreciate the above may be too evangelical for some readers’ taste, but for those of you who are still with me, here is some further reading. If you haven’t already, you should check out this original groundbreaking thought piece from Naval Ravikant, which helped kick me off on this journey all those years ago…
Originally published at medium.com.
