Everything You Need to Know About Blockchain

A Financial War is coming.

The blockchain revolution is coming. And it’s going to fundamentally change how businesses operate.

Make no mistake… this revolution is at least as significant as the one brought about by the Internet. It will disrupt every single business on the face of the earth.

And you won’t hear much about it in the mainstream media.

“Blockchain” is one of those words that has the power to confuse even the smartest investors. And the media is completely clueless about how this technology actually works.

Most journalists just can’t wrap their heads around the blockchain, bitcoin, and cryptocurrencies.

I’ve seen articles written in the likes of The Wall Street Journal on cryptocurrencies that were factually incorrect. This is all just a reminder that what you read in the mainstream media on cryptocurrencies should be taken with a liberal dose of salt.

In this article, I’m going to explain exactly how the blockchain and cryptocurrencies work.

I know you’ve heard about blockchain and cryptocurrencies. But it’s vital that you learn to understand this technology. Not only will it offer countless investment opportunities in the years ahead, but, as I said, it’s about to fundamentally change business as we know it.

The fundamental Conflict of interests in all companies.

For hundreds of years, the way that companies are structured and operated has changed little.

Investors provide capital to a centralized management hierarchy, which is overseen by a board of directors. The goal of these executives is to increase shareholder value by extracting the maximum possible value out of their customers.

Let me repeat that: Profit-seeking companies exist to generate as much value from you, the customer, as they can.

Pick any company or service you use or interact with, and think about how it looks to extract value — as much as possible — from you.

I’m not just talking about the obvious up-sells… the “would you like fries with that?”, or the “how about a muffin to go with your venti latte?” I’m talking about the algorithms that airlines use to ensure that airfares are priced for maximum profit. I’m talking about how “free” Facebook harvests your personal information, so it can charge more money to advertisers to deliver content to you. I’m talking about how Uber’s taxi pricing varies to maximize its profit at all times, charging you more when its cabs are busy. Everything from the way a department store lays out its merchandise, to how a website designs its home page, is designed to maximize profit from you, the customer.

As a customer, your interests are NOT aligned with the company providing you goods and services. There is a clear conflict of interest regardless of what wishy-washy marketing garbage they throw at you suggesting otherwise. Every company exists to make money. Is customer satisfaction important? Sure — but even that is a means to profit.

Executives are likewise incentivized to extract the maximum personal profit out of the company they work for. Think about any company you’ve ever worked for. Aside from personal job satisfaction, your compensation was likely the most important consideration. The more value you extract from customers, the higher your compensation.

What’s more, the more money you — as an employee — can extract from the company, the less that’s available for shareholders. This leads to the second conflict, which is known as the “agency problem”. Managers are supposed to act as agents for shareholders and maximize shareholder value. But the manager ‘ s primary interest is maximizing his own wealth. Just google “executive pay scandal” to see just how many companies are facing shareholder revolts regarding executives taking home fat salary packages — despite the company under-performing.

Again, despite talk of management and shareholder interests being aligned, there is a fundamental conflict between the two, because more value for shareholders means less for managers, and vice versa.

But today, we are on the verge of a radical transformation that has the capacity to completely eliminate these two fundamental conflicts of a company versus customer, and shareholder versus management.

It promises to eradicate the agency problem and overhaul our ideas of corporate governance. And more importantly, it has the ability to completely align customer and business interests in a way that renders traditional businesses uncompetitive to the point of becoming obsolete.

But how? In a word, the Blockchain.

To see just how transformative this technology will be, we first need to look at the blueprint for how companies are founded and invested in today…

Our story starts in Asia

During the 16th century, the presence of the West in Southeast Asia began to increase. It was during the 1500s that Europeans began to make forays into the region in search of spices and trade, and ostensibly to spread Christianity.

The Portuguese, along with the Spanish, initially opened up oceanic trading routes. The Portuguese were especially prominent in Asia and the Indian Ocean. They dominated the European spice trade, using the eastern coastal city of Lisbon as a hub to dispense imported goods throughout the European continent.

However, by the late 1500s, prices for spices began to rise because the Portuguese fleet could not provide enough supply to meet growing European demand. The Dutch, who had gone to war with Spain in 1580, faced a trade embargo by the Portuguese, who had united with the Spanish. This drove the Dutch to enter the spice trade. And by the late 1500s, they had begun to send trading ships to Asia themselves.

Following a few successful expeditions in 1595, the Dutch fleet grew exponentially. This dramatic growth would lead to a financial innovation that would change the face of capitalism for the next four centuries.

The Dutch East India Company

Known by its Dutch name, Verenigde Oostindische Compagnie(VOC), the Dutch East India Company was established in 1602. Because of the embargo, the Dutch government needed to support its own national trading route to the far east, so it handed the VOC a 21-year monopoly on importing the likes of cinnamon, cassia, cardamom, ginger, pepper and turmeric from Asia to the Netherlands. (This is known historically as the “spice trade”.)

Most historians consider VOC to be the first true publicly traded company. It was the first company in history to issue both bonds and stocks that were available to the general public. Whilst there were other companies that had previously issued stock (including a 12th-century water mill in France), the shares were not traded in a way that allowed for true public ownership.

VOC was listed on the Beurs van Hendrick de Keyser, the first commodity exchange in Amsterdam and the beginning of what we today recognize as a stock market.

The most successful corporation in history

From its establishment in 1602 through 1796, VOC surpassed all its trading rivals.

It sent nearly a million Europeans to work in Asia, who brought back over 2.5 million tons of Asian goods. By comparison, its nearest rival the British East India Company brought a mere fifth of VOC’s tonnage back to the west.

But the big innovation that VOC introduced, and which remains commonplace today, was the idea of limited liability. This meant that investor liability (or risk) would be limited only to their respective paid-in capital. This was critical as it allowed for shareholders to fund large-scale operations without the concern for personal recourse… that is to say, no personal liability beyond the capital provided to the company. Without limited liability, it would mean that in the event the company collapsed, the shareholders would be liable for all the obligations of the company and would be wiped out financially.

Limited liability corporations (LLC) have transformed capitalism because an LLC allows investors to invest in a company, safe in the knowledge that only their investment is at risk, not their whole personal wealth. If the company goes bankrupt, shareholders’ separate personal assets are not at risk. This limited liability concept has been a fundamental building block for capitalist enterprise, allowing investors to invest capital in businesses that take risks… when otherwise they would have avoided these businesses.

The first incidence of shareholder activism

Shareholder activism is when shareholders use their stake in a company to apply pressure to the company’s management, typically to press for changes they believe will increase the value of their shares.

A big reason shareholder activism exists is because of those inherent agency problems mentioned earlier –that is, the potential conflict of interest between management and shareholders. For example, if a CEO is getting a fat compensation package at a company that isn’t fulfilling its potential, how motivated is he going to be to take any risks to improve corporate performance –if a failure might result in his dismissal?

In 1609, a VOC shareholder filed a petition against the company. This was the first recorded incidence of shareholder activism. VOC shareholder Isaac Le Maire alleged that VOC’s board of directors was trying to “retain another’s money for longer or use it ways other than the latter wishes”. Nothing came of his activism.

And then 13 years later, in 1622, the first shareholder revolt took place. VOC investors complained the company’s account books had been “smeared with bacon” so that they might be “eaten by dogs” and demanded a full financial audit.

The Dutch state did not permit the VOC’s books to be publicly audited, but Prince Maurice of Orange (the Dutch leader at the time) ordered a detailed internal audit, which satisfied investors.

Not much has changed!

Looking back at the 400-year history of the Dutch East India Company, what’s remarkable is that a company founded in 1602 became the blueprint on which companies are still founded and invested in today. The vast majority of companies in existence and founded today use limited liability as a basic structure.

And as investors, we still face agency problems with management conflicted with shareholders. We still have the same corporate governance concerns. After all, Enron’s (the energy company that went spectacularly bankrupt after systematic accounting fraud) Chief Financial Officer, Andrew Fastow, and management were still able to cook the books and bring down the US$60 billion energy giant, although they used methods more sophisticated than “bacon” to do so.

Lack of transparency is still a huge problem in the world of investing. Again, management is not inclined to be wholly transparent with its shareholders. Nearly every major corporate financial scandal, from India’s Satyam Computer Services’ US$1.5 billion manipulations of its accounts in 2009 to the siphoning of money out of NYSE-listed Tyco by the CEO and CFO in 2002, was ultimately made possible by a lack of transparency.

The auditors themselves often didn’t see what was happening at the company –let alone investors.

What’s coming next

You won’t find much about what I’m about to describe in the mainstream media. I’m about to show you how Blockchain is going to completely rewrite the rules of corporate finance, transform corporate governance, engender complete transparency and render huge swathes of existing businesses uncompetitive.

But to understand how blockchain will do this, first, you need to understand how it works. I firmly believe that if you can grasp the concepts outlined in the next few segments it will open your eyes to the magnitude of the opportunities that blockchain can truly offer.

Understanding Bitcoin and Blockchain

Blockchain and Bitcoin are difficult concepts to grasp. Few people outside cryptographers and computer programming guys immediately “get” the underlying technology, especially when lots of technical jargon is thrown around.

In my experience, folks need some time to digest the broad concepts and then come back to them. It’s not easy –if it were, then everyone would already be invested in this space and there wouldn’t be so many opportunities.

For starters, Bitcoin with a capital “B” refers to the network (or blockchain), whereas bitcoin with a lowercase “b” refers to the bitcoin cryptocurrency.

Bitcoin (the network) allows us to transfer the bitcoin currency peer-to-peer (i.e., person to person) without any intermediary. Whereas transferring U.S. dollars from me to you means we either have to do it in person with me handing you cash, or through the banking system, which involves my bank and your bank.

Bitcoin is a currency, and it’s liquid (that means it’s easy to convert into U.S. dollars and other fiat currencies and cryptocurrencies). Over half a billion dollars in bitcoin are traded every day. You can take out your phone and transfer US$10 million in bitcoin to me. I’ll have it in minutes, and there are no intermediaries required.

But how does it actually work?

Think of the Bitcoin blockchain as a giant Excel spreadsheet that shows the complete transaction history and location of every bitcoin.

Every 10 minutes the spreadsheet gets updated as an additional “block” of new transactions is added to the spreadsheet.

Everyone can have their own copy of the spreadsheet. It’s completely transparent.

Let’s say Jim sends 1 bitcoin to Sally. When the transaction is processed by the blockchain, the spreadsheet is updated. Jim’s balance is docked a bitcoin, and Sally’s is credited one.

But who updates the spreadsheet? And how do we stop people from trying to make false updates to the spreadsheet, awarding themselves more bitcoin, or trying to send the same bitcoin to two different people at the same time?

That’s the job of the nodes, also known as miners. Nodes are the computers or large computer systems that support the Bitcoin network and keep it running smoothly. Nodes are run by individuals or groups of people who contribute money towards buying powerful computer systems, known as mining rigs.

There are two types of nodes, full nodes, and lightweight nodes.

Full nodes keep a complete copy of the blockchain (i.e., the giant excel spreadsheet). This is a record of every single transaction that has ever occurred. This is currently around 195 gigabytes in size. (For reference, the largest USB thumb drives usually max out at about 128 gigabytes.)

Lightweight nodes, on the other hand, only download a fraction of the blockchain. Lightweight nodes are used by most folks for bitcoin transactions. A lightweight node will communicate to a full node when it wants to transact.

So the full nodes (or miners) run the spreadsheet, but how do they keep the spreadsheet synchronized between them all? This is the key, considering there’s no limit to the number of people who can run their own full node.

How do nodes process transactions?

Let’s go back to Jim and Sally. Jim wants to send 1 bitcoin to Sally.

Sally creates a bitcoin wallet. Anyone can create a bitcoin wallet in a couple of minutes. When you create your wallet, there are two pieces of information created for you:

1. Your public key: Also known as a public address, or your bitcoin address. It’s a string of numbers and letters. Think of it as an account user name.
2. Your private key: This is your password, and you need to keep it safe. If you lose it, it means you lose access to your bitcoin. (There’s no centralized entity that can recover your password for you –it’s not like if you forget your Facebook password and you have email instructions sent to you to reset it.)

Sally tells Jim her public key. Jim opens his bitcoin wallet, puts in the instruction to send 1 bitcoin to Sally’s public address, enters in his private key (password) to authorize the transaction and hits send.

After a few minutes, Sally checks her wallet again and sees she now has a bitcoin in her wallet. But what’s happening behind the scenes?

First, the network (in this case a lightweight node) makes a quick check of the proposed transaction. It checks to see that Jim has enough bitcoin in his account. And it checks if the address Sally provided is a valid bitcoin address.

After the transaction passes those two tests, the transaction gets bundled together with other pending transactions into a “block”.

That block then goes to the miners. The goal of the miners is to verify the block and add it to the blockchain (i.e., update the spreadsheet).

How does a miner get to add a block to the blockchain? This is where brute force mining comes into play.

Hashes, and how mining works

To understand this, we need to touch upon hashes.

A hash value is a series of numbers and letters strung together that looks something like this: 1gwv7fpx97hmavc6inruz36j5h2kfi803jnhg.

A hash value is generated by pushing data through a mathematical formula called a hash function.

Another way to think of this is like the ingredients for a smoothie and a blender.

You take your ingredients (your data), put it through a blender (the hash function), and you get your smoothie (the hash value).

Hashing is a one-way process. When you give me a hash value, I can’t turn it back into its original input data, in the same way, I can’t turn my smoothie back into its original ingredients.

When miners are given a block of transactions to try and add to the blockchain, they are using a hash function to try and solve a cryptographic puzzle.

The miners take the new block with all the transactions in it, combine it with a randomly generated number string (called a nonce), put it through a hash function and then get a particular hash value.

What a miner is trying to do is find a hash value that starts with a specific number of 0s. They will keep trying different nonces until they get the necessary hash value.

This trial and error computation is shown in Step 1 and Step 2 in the diagram below.

All the miners are in a race to find the correct hash value. This is because the miner who finds it (Step 3) will broadcast the correct solution to the network (Step 4), who will verify it is correct.

The new block then gets added to the blockchain (Step 5), and the winning miner gets awarded 12 bitcoin by the blockchain for his success.

Sally’s bitcoin transaction is now recorded in the blockchain. Sally’s bitcoin wallet is now credited a bitcoin, and Jim’s is debited one.

The mining process then starts over again, with a whole new bunch of transactions bundled into a new block, and the miners all compete again to find the correct hash value.

Keeping it Difficult for miners.

As the example shows, if a miner can try different nonces faster, then he stands a better chance of winning the next block. Therefore, miners constantly add bigger and better computers to crunch numbers faster than the next guy. Additionally, new miners can come online and start to compete for the bitcoin block prize.

But doesn’t that mean that blocks will get mined faster and faster, causing bitcoin rewards to be awarded faster, thereby flooding the system with lots of bitcoin? The Bitcoin algorithm takes care of that.

Every two weeks, the algorithm increases the required number of 0s a hash value must begin with.

This is to ensure that the total network mining capacity (known as hashing power) can only generate one block roughly every 10 minutes. At the moment, given the increase in transaction volumes on the Bitcoin network, transactions are queued and can take anywhere from one to three hours to be confirmed. New measures to scale the network are being introduced, although it’s not necessary to go into the finer details now.

Bitcoin is the “Proof Of Concept”. The real magic comes next

In the media, bitcoin tends to hog the headlines when it comes to cryptocurrencies. But Bitcoin itself is just the proof of concept for blockchain. Bitcoin’s success has shown the world it is possible for independent and fragmented entities (miners) to enable strangers to exchange value with no need for an intermediary. And it can be done in a completely transparent, verifiable and open way.

As email is one use case for the Internet, so too is Bitcoin a single use case for blockchain. But here I’m not just talking about Bitcoin. I’m talking about two critical innovations that are built on top of the blockchain. These two innovations are what will solve those fundamental conflicts we talked about earlier –the conflict between a business and its customers, and between employees and the companies they work for.

Smart contracts

The term “smart contract” was originally coined back in 1994 by a legal scholar and cryptographer by the name of Nick Szabo. He realized that a decentralized ledger (like blockchain) could be used for digital or self-executing contracts. Instead of Bitcoin blocks containing transactions, these blocks could contain computer code that executed under certain conditions.

Here’s an example using Sally and Jim from earlier: Let’s say Jim is buying an iPhone from Sally, which she advertised online for one bitcoin. Jim doesn’t know Sally. So he only wants to pay for it when he takes delivery because he doesn’t necessarily trust her. Sally, on the other hand, doesn’t want to wait until Jim has the iPhone, in case he doesn’t pay.

In this case, bitcoin doesn’t really help. Bitcoin doesn’t solve the real-world trust issue that exists between the two.

That’s where a simple smart contract comes in.

A simple smart contract allows for Jim to pay the bitcoin to Sally into an escrow-style account built on a smart contract blockchain. Sally can see the bitcoin has been paid so Jim is a real customer. The smart contract states that when delivery is complete, the payment will be released to her. And Jim knows that if the UPS parcel never shows up, he can get his bitcoin released back to him.

How is this different from traditional escrow?

Firstly, there’s no centralized middle-man (i.e., the escrow company). Secondly, fees are either non-existent or minimal (with real estate transactions, escrow service can cost US$1,000 or more). Thirdly, current escrow systems work well for larger transaction sizes, but not smaller ones. A smart contract escrow is scalable to support both large and small transactions.

This kind of escrow is an extremely simple use case, so let’s expand it further to other businesses.

Example 1: Music royalties

A music industry artist (or their record label) is entitled to receive royalties every time their content is used for commercial purposes, i.e., sold through Apple’s iTunes or streamed on music-on-demand service Spotify.

When you pay to download music from iTunes, Apple takes a 30 percent cut before paying the remainder to the record label, who pays their artist accordingly. But the Berklee College of Music estimates that anywhere from 20 to 50 percent of royalties never make it to the musicians themselves.

Now imagine if you will, a blockchain-based version of iTunes where artists upload and sell their own copyright-protected music.

Your smart contract can define any kind of revenue split you want. If there’s no record label and the band is independent, then the smart contract can apportion an equal third share between the singer, drummer and guitar player.

When a customer buys an album, the money is automatically and immediately sent into the three separate bitcoin wallets specified in the smart contract.

If there’s a record label, the smart contract can define that 30 percent goes to the label and the rest goes to the singer, drummer and guitar player.

Example 2: Lotteries

Lotteries, along with traditional and online gambling, are highly regulated, extremely opaque and very inefficient.

When we talk about efficiency, we’re looking specifically at the payout ratio –how much of the total ticket sales revenue is paid out to punters in prize money?

The higher the payout ratio, the better value you get for your bet.

For example, if you were gambling on a coin toss, the odds are 50/50. If you bet a dollar on heads, you should get a dollar if heads comes up. If tails comes up, you lose your dollar.

But would you bet a dollar on a coin toss if when it landed on heads you only got 50 cents… and you still lost your dollar if it came up tails?

Probably not, right? That’s a payout ratio of just 50 percent. You’re winning half of what the odds say you should receive when you win.

Well, if you play the lottery in the U.K., then you aren’t getting much better odds. Take a look at the numbers below for the National Lottery in the U.K. for the year ending31 March 2017.

Prize money payouts were less than 57 percent of ticket sales (i.e. revenue) thanks to taxes and commissions.

Imagine, on the other hand, a global lottery blockchain built on simple smart contracts. Punters from all over the world would be able to send a specified dollar amount in bitcoin (in a smart contract) to the blockchain. That smart contract would contain their lottery number choices, the draw date and their bitcoin address where winnings can be paid.

The blockchain would hold the money in a bitcoin wallet. All participants would be able to see the number of tickets purchased. At a pre-specified time, a mathematically provably-fair random number drawing process would take place. This simply codes that self-executes.

The code would execute smart contracts that immediately distribute prize money payouts to the winner(s).

The entire lottery blockchain is completely transparent, it runs autonomously (it purely exists as self-executing code), it’s provably fair and it can provide a payout ratio far higher than any existing traditional lotteries.

Decentralized Autonomous Organisations

The music distribution platform and the global lottery are examples of Decentralised Autonomous Organisations, also known as DAOs.

What is DAO? It’s an entity that uses the power of the blockchain, coupled with smart contracts, to operate a completely transparent business enterprise that typically aligns its stakeholders with its users/customers.

So how does a DAO come into existence? Let’s look at the lottery example:

One entrepreneur thinks there’s a market for a global blockchain-based bitcoin lottery so he decides to create a DAO called BlockLottery as a fair and efficient means of letting people all over the world take part in a weekly lottery draw. His customers will enjoy complete transparency. They can participate in anonymously online. If so inclined, they might “forget” to mention any big wins to their tax authorities (of course not recommended). And there are no oversized novelty cheques involved.

In order for this BlockLottery DAO to be successful, it needs to accomplish three things:

1. It must be completely transparent: Anyone who participates in the lottery needs to be able to see that the number drawing and the money collection/payout process is coded robustly. If that can’t be verified then nobody will trust the lottery.
2. It needs to be decentralized: Would you participate in a global online lottery if it was being run by a company that has the power to simply shut down its servers and its websites and disappear with the ticket proceeds? No.
   Decentralization means there’s no single point of failure. Bitcoin has nodes (miners) all over the world, so if one or a few go down, the network carries on regardless. The BlockLottery blockchain needs to be similarly decentralized.
3. It needs distribution, initial capital, and vested interests: It will require some initial capital to get off the ground, build the infrastructure, build awareness and advertising.
   Additionally, you want to create an alignment of interests. You want the miners who support the network, as well as the customers and the stakeholders (explained shortly) all to be unified.

BlockLottery builds its blockchain platform and creates a custom cryptocurrency called LotteryCoin. (Please note the terms cryptocurrency, coin, or token are used interchangeably).

Think of these cryptocurrencies as being similar to shares. (We will set aside regulatory concerns for the time being.) Let’s say that as an owner of either of these coins, you are entitled to a share of the lottery ticket revenue.

In order to distribute LotteryCoins, the entrepreneur holds an Initial Coin Offering (ICO). He outlines his business case along with technical details in a document called a whitepaper, which he publishes online.

The entrepreneur plans to auction off 1 million LotteryCoins to the general public.

His ICO ends up raising US$10 million in bitcoin (ICO’s usually raise funds using bitcoin). Investors give bitcoin and get newly minted LotteryCoin in return. These LotteryCoin are like shares, they provide economic value.

The US$10 million goes towards building the blockchain, marketing, and advertising and building a critical mass of users.

But who runs the blockchain?

There need to be embedded economic incentives in any sustainable DAO.

In the case of Bitcoin, miners (or nodes) support the Bitcoin network by performing cryptographic proofs and keeping copies of the blockchain in return for a chance of winning some bitcoin.

In our BlockLottery example, the entrepreneur would need people to run nodes (i.e. be miners) for his blockchain networks. He needs enough of them to ensure that the network is decentralized and that there is no single point of failure.

In order to incentivize them to commit computational resources for doing this, he needs to give them some economic return. The blockchain can code in a certain percentage of profits or revenue to be distributed amongst the nodes in return for running the network.

Let’s say that 5 percent of all ticket sales go into a pot that is distributed amongst the miners along with the LotteryCoin holders.

Now once the blockchain is launched, nobody can unilaterally alter it. Nobody can “rig” the lottery, for example.

But where DAOs are truly beginning to shine, is where they can take the vested interests of token owners, miners, and customers and use them to evolve.

Let me explain.

Let’s say the BlockLottery blockchain has been launched and is up and running. Every week, US$10 million worth of global BlockLottery tickets are sold.

Every weekend, the winning results are drawn, and prizes are automatically credited to the winning ticket holders. The miners and token holders get their cut as well.

But the blockchain also reserves 1 percent of revenues for “Special Projects”.

Let’s say I’m a holder of BlockLottery coins and I want to help increase their value. I’ve got an idea to include a monthly mega PowerBall draw in addition to the weekly regular lottery. So I put together a proposal, get a coder to put together the necessary programming and then I submit it to the community for Special Project approval.

I tell the community that for US$10,000 I can put this all together and help implement it in the BlockLottery blockchain.

The token holders vote on the proposal, and if I’m successful a smart contract is created. The smart contract lays out what I have to provide (i.e., the monthly mega PowerBall draw code along with technical specifications), and the terms associated with it (i.e., deadline and cost).

When I complete my task and it gets approved by the community, my fee is paid to me and the new lottery product is released, thereby increasing the value of the BlockLottery tokens.

If this sounds far-fetched then rest assured, DAOs are already here, and they are already governing and improving themselves by using these kinds of community contracts.

And why not? When you step back and think about it, the vested interests are all aligned:

The contractor: I want to increase the value of the network and I have an idea how to do it, with a newly added PowerBall monthly draw. I want to implement it, and get paid for doing so. I want to build a solid reputation so I make sure I deliver what I say I will, which means next time I might be able to put forward an even more lucrative idea. My payment is also a smart contract, which means if I don’t do what I say I will, I don’t get paid.

The community: The community wants contractors to put forward good ideas to help build the value of tokens and increase ticket revenue. Ideas can be anything from technical to marketing. The community wants to encourage stakeholders to keep coming forward with good ideas, by rewarding people for executing well and ditching folks who don’t deliver.

Although DAOs are built on code, they still require people. The robotics revolution replaced a hundred assembly line workers with a few machines, but we still need someone to keep an eye on the machines. In this case, we have a vested community keeping an eye on our lottery blockchain.

The customer: He’s already getting the best payout ratio of any large lottery in the world, and now he’s getting more games added. If he owns tokens as well, then he’s also far more likely to recommend BlockLottery to his friends.

When you add all this up, how can a traditional lottery possibly compete with this business model?

The Power Of Aligned Interests

To get an idea of how powerful aligned interests can be, here’s an example (with no blockchain in sight). Look at The Vanguard Group, the U.S. investment management company with over US$4.2 trillion in assets under management (AUM). It’s the second-largest fund manager in the world after BlackRock.

You are likely already familiar with Vanguard’s mutual funds and ETFs, and you probably associate them with being extremely low cost.

ETFs charge an annual expense ratio to ETF holders –this is expressed as a percentage of the fund’s net assets and is for portfolio management, administration, market and distribution expenses.

As of the end of 2016, Vanguard’s expense ratios were 68 percent lower than the industry average.

Here are some examples of Vanguard’s ETF expense ratios versus its biggest competitor, BlackRock’s iShares ETFs. For example, for their respective U.S. corporate bond ETFs, iShares charges 0.15 percent, twice the 0.07 percent of Vanguard.

The reason Vanguard is so competitive isn’t just the economy of scale achievable by having a large AUM compared to its competitors (an expense ratio can fall as AUM increases), rather it’s Vanguard’s corporate structure.

You see, Vanguard is owned by its funds, instead of by shareholders. And under its agreement with the funds, Vanguard has to operate “at cost”, charging only enough to cover its cost of operations.

This means that Vanguard doesn’t need to charge its customers high fees to generate profits to pay shareholders. Of course, the company still needs to pay competitive compensation to its employees. But this structure means that every dollar that comes in goes directly towards reducing the costs (i.e., the expense ratios) of its funds.

Vanguard doesn’t have investors on its back pushing for higher profits and increasing dividends. The conflict between shareholders and customers has been completely eradicated.

How can other ETF providers ever compete with this structure? They can’t.

In 2016, Vanguard’s average fund expense ratio (weighted by assets per fund) was just 0.12 percent, less than a fifth of the industry average, according to Morningstar.

Vanguard is an easy-to-understand example of how powerful it can be when the customer and the enterprise interests are aligned.

War is coming

Decentralization represents an existential threat to existing centralized businesses that collectively make hundreds of billions or even trillions of dollars of profit.

Look at some of the largest technology businesses in the world today. Take Uber, for example. Uber doesn’t own any taxis, doesn’t hire drivers, doesn’t own any taxi licenses. What is Uber? It’s essentially code that connects people who want to go from A to B with drivers who want to earn some money from taking them there.

But Uber wants you as a customer to pay the highest possible fare, whilst paying as little as possible of that to the driver.

Or what about Airbnb? The company doesn’t own any real estate or provide any hospitality services. It simply connects people who want to monetize a spare property or room, with someone who needs a roof over their head.

And it earns a lot of money doing so. Airbnb charges hosts (people who provide accommodation) anywhere from 3 to 5 percent and charges guests up to 15 percent.

What if DAOs were launched targeting these two business models?

What if, for example, a blockchain Uber issued its own digital currency? (Remember, there are already hundreds of cryptocurrencies out there that are liquid and tradeable against bitcoin and U.S. dollars –they are digital assets with real value).

What if the blockchain Uber platform was owned by its riders and its drivers as a decentralized, blockchain-based cooperative, transacting in its own digital currency. It might sound far-fetched, but it’s not. Over the next few years, these are the kinds of businesses that will emerge. There are already companies out there building decentralized companies.

Peerplays, for example, is an online gambling and sports betting blockchain that is launching its first betting application next month. Steemit is a social media platform that exists entirely on blockchain –it rewards people for popular posts with its own cryptocurrency that can be converted into dollars.

So what will companies like Uber and Airbnb do? They will do what any entity does when threatened, they will fight. They will lobby governments to protect them. Just take a look at the tobacco industry, for example. Tobacco kills people, period. No exceptions. But in the U.S. since 1998, the industry has spent over half a billion dollars lobbying to protect itself.

In short, a war between traditional businesses and DAOs is coming.

Summing up

As I’ve shown you in this article, the revolution is coming. It’s already underway. And it’s vital that you understand this technology, as it will offer countless investment opportunities in the years ahead. It will also fundamentally change business as we know it.

Thanks for reading! Feel free to check out some of my similar Cryptocurrency related post below.

• How to Earn Crypto Income From Komodo (KMD)
• “Lock” Your BIX Tokens Today to Continue Receiving Your BIX Incentive Reward
• How to Earn ONG From Ontology (ONT)
• Zilliqa: Progress and Update, June 2019

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