Some blockchain musings

Below are some of the questions addressed in recent interviews on broad blockchain/crypto issues.

How​ ​is blockchain​ ​changing the​ ​world​ ​today?

Blockchain has created an extremely compelling promise of a new Internet that is decentralized on many levels — in terms of computing power, storage capacity, content creation, data mining and sharing, diminished or non-existent censorship, smart contracts, etc.

The above profoundly impacts multiple large segments of economy and society, where tremendous optimization/removal of externalities or entirely new economic models are possible — digital storage, prediction markets, cybersecurity, money and financial infrastructure, identity, capital markets, asset management, legal services, supply chain management, voting, energy distribution and broad range of digital media, to name the “most obvious” ones.

What’s more, blockchain technology has become the foundational tech for cryptocurrencies which, via combination of cryptographic security and economic incentives achieve social scalability — and therefore can drive crowdfunding and crowdsourcing of underlying new products and services, fuel the growth of new global economies and personal wealth. What is remarkable, the new economies and their intrinsic cryptocurrency-based monetary systems can be evolve around specific products or within networks that transcend state borders. They all are global phenomena by design.

All the above describes the tremendous promise of blockchain to change the world and points to the economic incentives it has unleashed. Blockchain technology is changing the world today by leading:

A) an unprecedented “talent grab” by the new sectors of economy that are already attracting some of the best technical and business minds

B) a generational wealth transfer through investment into cryptocurrencies

C) a global concentration of resources — to respond by increasing competitiveness of incumbent products, platforms, as well as public and private institutions and to solve the existing fundamental problems of blockchain itself — intense resource consumption and transactional inefficiency

​How​ ​do​ ​you​ ​see​ ​blockchain​ ​technology​ ​evolving​ ​in​ ​the​ ​next​ ​five​ ​years​ ​from​ ​now?

I believe that blockchain will be ubiquitous, it will penetrate the known sectors with identified use-cases deeply and widely, many of today’s skeptics and opposing institutions with sharper senses of pragmatism or self-preservation will integrate the technology as the key competitive tool.

To give one ironic example, those with an incurable instinct for control and centralization, like the less democratic governments or monopolies, will seek to utilize blockchains in their captive or internal systems as the ultimate mechanisms of oversight and access to information through control of the nodes. We are already seeing the early signs of that in some “state digital currency” initiatives. State-controlled paper currency is much more anonymous than a state-controlled digital one. Such ideas aren’t half bad, by the way, so long as they stimulate awareness and public discourse.

The applications of blockchain, including money in the form of digital currencies, will see mass adoption driven by wealth distribution that fuels the global consumer demand — the ultimate disruptive force in technological innovation. Historic examples are too plentiful, as are the carcasses of large prehistoric animals that did not adapt fast enough.

The global pooling of individual resources (because incentives and no gatekeepers!) will drive a massive boost in competition across a broad range of on- and offline industries (if those are still a thing), democratize access to capital and, combined with market forces, do a better job than the governments at managing money, public infrastructure, income equality and monopolies.

​Bitcoin​ was thought to bring​ ​the​ ​freedom​ ​of​ decentralized ​financial​ ​transactions,​ ​but​ ​how secure​ is ​it​?​ ​

Bitcoin increasingly looks like a product that has taken a consumer-dictated deviation from its originally envisioned purpose of “A peer-to-peer electronic cash system” (as defined by S. Nakamoto in his/her/their seminal white paper). That is if one takes the purpose iterated by the inventor literally.

Digging deeper into the underlying technology makes it quite clear that the most central principles of Bitcoin design are diminishing returns, scarcity of incentives and the sacrifice of transactional efficiency for the sake of network security and social scalability. That, along with the speculative volatility and a rigid protocol design technically unfit to support an intense flow of transactions (and unlikely to change, as no one is in charge), has made Bitcoin an unprecedented instrument to store value. As such, it has absolutely excelled and feels very safe in relative terms — it is, as of late January 2018, a $200 billion bounty chest for anyone who dares to try hacking it. In more than 9 years, no one has succeeded.

We can look at the security problem less philosophically and with examples. In blockchain protocols, including Bitcoin, any data (including money) is stored literally everywhere — on thousands of computers in 100+ countries, as opposed to a specific bank’s database or vault. Anyone can guess what is simpler to steal from. Also, blockchains require the use of private cryptographic keys that are stored offline, unlike credit cards, for instance, which require the disclosure of CVCs in every online transaction.

What​ ​is​ ​the​ ​benefit​ ​of​ ​having​ ​many​ ​different​ ​cryptocurrencies?​ ​Can​ ​these cryptocurrencies​ ​somehow​ ​overcome​ ​the​ ​existing​ ​world​ ​currencies​ ​and​ can​ ​millennials​ ​fully​ ​adapt​ ​to​ ​cryptocurrency​ ​usage?

Many cryptocurrencies reflect a very healthy and progressive trend of global experimentation with blockchain use-cases and related business opportunities, that are almost entirely crowdfunded and supported by a massive and global defection of technical talent and other resources from the more traditional sectors of economy.

No one, but the most zealous crypto-anarchists, considers toppling governments or spreading worldwide financial instability as the core objective or inevitability of the crypto phenomenon. That said, there is a whole host of public services (including monetary policy) that are performed very poorly, rife with inherent conflicts of interest and face no pressure to improve.

Cryptocurrencies are likely to give the governments a run for their money as viable alternatives to sovereign currencies in many sectors of the economy that can be driven without the regulatory interference. They are also almost impossible to resist or control within specific state boundaries over the long term. The hope is that they will be embraced sooner, rather than later, and will force the governments to adapt and compete in sportsmanlike manner, thereby improving the performance of the public services.

Millennials were born in the Digital Age, they are online natives who view the world through the Internet lenses. There is going to be no question to them, for instance, what is or will be a better store of value — a stable and liquid cryptocurrency or gold. Because anything that does not fit into a smartphone is a poor UX by definition, which any generation should find hard to disagree with by now, with few scarce nostalgic exceptions like paper books. Millennials are also arguably less adept at working under authority in structured environments and are generally worse off than their parents. They will appreciate the entrepreneurial opportunities and ensuing wealth distribution offered by cryptocurrencies — a lot.

Will the cryptocurrency space get as crowded as the App Store?

In my view, arrival of cryptocurrencies ushered an era of a more competitive world driven by purer forces of supply and demand, with less externalities and market distortions. More projects have access to capital and experimentations, and more great ideas supported by talented teams will have chances to reach their markets and, possibly, mature into viable businesses.

But traction will also be far more visible and those without a market, real purpose or social significance will enjoy a shorter “hype ride” and die quicker than some VC-funded startups. Both as the public support for these new projects wanes and venture capitalists are less likely to allocate resources to something that looks questionable. That obviously goes for majority of opportunistic “ICO for the sake of raising money” live projects today. That will also become a lot more prominent when we reach the mature equilibrium in the crypto-funding markets, with the regulatory environment also significantly evolved.

​What​ ​is​ ​the​ ​future ​of cryptocurrencies​?​ ​Are​ ​we​ ​seriously​ ​looking​ ​to​ ​replace​ ​our​ ​known​ ​currencies with​ ​cryptocurrencies?

It is altogether unlikely that citizens will stop needing public servants to protect their wealth, health, civil and human rights, integrity of state borders, deliver their basic educational needs, represent them as nations or uphold the rule of law. That said, blockchain in general paves way for the most formidable competition to governments to date in many areas of their core purpose — including, in managing the economy and public finances. There, cryptocurrencies pose a specific disruptive alternative to central banks. But their purpose is not revolution — they merely unlock market efficiencies and freedom of choice that will exert competitive pressures on sovereign currencies and governments that are used to throwing money at problems. Whether governments will be able to evolve and compete at a higher level, remains an open debate.

HODL investing strategy — good or bad? At what point should an investor panic and withdraw?

HODL is neither good nor bad — as any strategy it is a matter of personal outlook. Success in investments and capital markets is relative. An investment thesis (and horizon) is the key competitive advantage in the current volatile crypto markets that are dominated by unprofessional retail investors and prone to herd mentality.

Those of us taking the long-term view believe that cryptocurrencies as an asset class fulfill the premise of democratized money and uncensored financial systems. I, for one, believe that various aspects of the premise can be delivered by a few digital currencies anchored by global use-cases, rather than geographies and nation-states.

Bitcoin, for all its technical limitations that make it an unlikely “medium of exchange”, appears to have the brand and liquidity to be the leading contender to service the untapped consumer demand for the universal “store of value”. Gold is the only viable benchmark that is over 25x the current capitalization of Bitcoin, but it only serves the few with resources to invest in bullion storage or gold derivatives. Imagine the incremental value from those with access to internet but no means to protect their wealth by investing in gold. Likely a multiple of the upside in just replacing gold.

If one does invest in Bitcoin, but does not hold a long-term view and therefore think of themselves as a good trader (better than others in the market), they should simply understand what drives volatility and look for cues that signal a change of direction. Those would include regulatory action, technical challenges and success of currencies competing for the same use-case, institutional money bidding against the market, etc.

Investors should not panic. Greed is good, but should be informed by understanding technology and history. It should also be limited by specific volume of capital an investor is not afraid to lose.

Where do you see Bitcoin price going in 2018?

At least many tens of thousands of $$, unless there are cataclysmic events that will gravely wound the market.

2018 is going to be the year when a lot of retail money shifts from many of the riskier altcoins — as their futility, lack of performance/traction of the underlying platforms and outright scams get called out — into the more established, proven and liquid cryptocurrencies. Bitcoin is firmly in the latter category which will also be the first one to absorb the major institutional liquidity. That liquidity will finally pour into the crypto market at scale with ramp-up of regulation, improvements in trading/custodial infrastructure, greater security of centralized exchanges, wider adoption of decentralized ones and proliferation of ETFs, futures and other derivatives.