Introducing: Get in the NODE
An Intro to the World of Cryptoassets
Decentralized networks offer immense potential to change the way people come together to exchange value. The movement draws attention from all types of people from all walks of life — tech enthusiasts, speculators, libertarians, entrepreneurs, governments, and so on—in an incredibly global and viral way.
For all the potential impact blockchain has in store for the world, it is truly a steep learning curve for anyone trying to get up to speed and participate in a meaningful way. While there are countless online destinations that cover the space, there are very few that provide quality, curated content that is easily digestible. At Human Ventures we believe that, for the world to begin bearing the fruits of what this new asset class can provide in a more mainstream way, more people will have to be properly on-boarded in an inclusive way.
To this end, we’ve created Get in the NODE to cover the basic building blocks as well as interesting initiatives in the space, while adding our view on specific topics we’re excited about. We will be publishing a new post every two weeks and hope that newcomers and more knowledgeable folks alike are able to learn.
With that, we’ll begin with P2P networks, as they are the foundation of decentralized networks.
A Brief History of Peer-to-Peer (P2P) Networks
P2P networks first became widely used in the early 2000s. The earliest mainstream versions, such as Napster and Limewire, allowed computers to connect and freely exchange files over the internet without an intermediary.
The decentralized nature of P2P networks makes them extremely difficult to wipe out completely, since each participant in the network would have to be stopped and a new spin-off of the prior network is very easy to launch (see the whack-a-mole chase police have had with Pirate Bay). Yet, none of these P2P networks have scaled in a sustainable manner over the long-term due to one critical factor. Digital media has been highly replicable in nature and there has been no incentive system for users to seed their files and grow the network significantly. Incentives in a digital network cannot be created without digital scarcity.
Without scarcity → No value creation
No value creation→ no incentives for users to add value to the network
Without a proper incentive system backed by digital scarcity, a large number of nodes won’t contribute their resources to grow the network. Given these important characteristics, it is no surprise these types of networks have kept a niche role in society. But the beauty of tech is that it does not stay stagnant…
The Launch of Bitcoin
In 2008, an individual (or group of individuals) under the pseudonym of Satoshi Nakamoto published a ground-breaking white paper introducing the concept of Bitcoin. This was the first digital-native asset that possessed the characteristics of money, namely:
- Scarcity - there will only be 21 million ever available and released to the public according to a set supply schedule
- Fungibility - each bitcoin is interchangeable and worth as much as any other bitcoin
- Divisibility - a bitcoin is divisible to the eight decimal point (ie. you don’t need to buy 1 bitcoin in order to possess it; fractional ownership possible)
- Durability - bitcoin is a digital-native asset; the internet would have to be taken down completely for it to disappear
- Transferability - users only need access to internet to buy and sell bitcoins
Through a mix of game theory, monetary policy, and cryptography, bitcoin introduced the world’s first cryptoasset. These disciplines date back centuries and, when combined, allow for the creation of networks that simultaneously act in their self-interest and in the greater interest of the community. In bitcoin’s case, its unminted supply (coins not yet in circulation) is issued to miners as an incentive to secure the network on the blockchain, allowing any coinholder the ability to instantly and trustlessly transfer bitcoins to anyone in the world.
From its humble beginnings as a digital toy that very few took seriously, it has skyrocketed in value to $168 billion today. In the process, the asset has captured the imagination of many and inspired a plethora of new protocols that are constantly pushing the boundaries of what decentralized networks are able to accomplish.
Now let’s talk about blockchain, the technology that forms the backbone of cryptoassets (for purposes of this post we will focus on public blockchains).
What is Blockchain
Historically, we’ve had to rely on trusted intermediaries to keep custody of our assets and facilitate transactions. Their centralized nature has allowed them to extract value from the network in exchange for playing this important role.
Now imagine a world where we don’t have to depend on intermediaries, where end users can take back more power and value— enter blockchain. Building off of the concept of P2P networks, a blockchain is a distributed, transparent, and immutable ledger that is secured and maintained by nodes.
In the Bitcoin protocol, a number of transactions are put into one “block” of transactions (this number is constrained by the block’s memory capacity, which varies by protocol), and each block is linked to the block before it through cryptography. In order for a hacker to corrupt a block, first they would have to hack every single one before it. Think of it as a fly trapped in amber — over the course of centuries more layers of amber are added, making the fly more difficult to access (credit to Nick Szabo for the analogy).
Why Does Blockchain Matter?
Today, most ledgers and databases are highly centralized, meaning one entity, or small group of entities, have complete control over it. For example, let’s take the example of processing a remittance through the traditional banking system.
Jack wants to send a payment to his sister, Jill, to help her make ends meet while she looks for a new job. However, Jack lives in the United States and Jill lives in Australia. Because their two banks don’t have an established relationship, Jack’s bank needs to find a correspondent bank that has a relationship with both. Correspondent bank A is only able to find another correspondent in Australia that has a direct relationship with Jill’s bank (the layers of intermediaries are adding up!). At this point, the money finally has a path to get Jill. The transfer begins and by the end of the week, she receives enough cash to get her through the next month of job searching.
These transactions involve multiple rent-seeking intermediaries that represent central points of failure, increase processing time, and increase costs. Let’s take a closer look at the implications.
Security
These types of ledgers represent intermediaries that end users have to trust in various ways:
- Trust that they won’t get hacked
- Trust that they won’t freeze assets
- Trust that they won’t misuse your assets
Bitcoin’s blockchain presents one of the world’s greatest bounties, holding hundreds of billions in market value. An untold amount of hackers have tried to pry their way in and, amazingly, it has never been hacked! How is that for a secure and resilient network?
Transaction Efficiency
A bank will typically take 2–5 business days to process a money transfer (hope you’re patient!). Cryptocurrency transactions take place in as fast as a couple minutes to as long as a few hours during periods of high transaction volume. No contest here.
Access
There are 2 billion people on this planet who are unbanked. Due to banks’ fixed overhead and reliance on legacy systems, it’s not profitable for them to serve individuals below a certain level of income. As more people gain access to the internet, they will be able to bypass the traditional banking system and gain immediate access to financial services through cryptocurrencies.
Additionally, banks charge around 7% for each remittance. Cryptocurrency fees depend on the protocol, but are typically pennies and have only risen to $40–$60 during periods of high volume. For the ~$500 billion remittance market the more convenient and affordable option is clear.
Blockchain technology is powering the future of cryptoassets through its innovative properties. The use case we focused on in this post, payments, is one of various use cases that entrepreneurs are experimenting with and we will focus on these in future posts. At the same time, blockchains are evolving — specifically as it pertains to how they are secured by their network. Stay tuned for our next post where we will delve into the dynamics and nuances of consensus mechanisms.
Human Ventures is a company builder and venture fund based in New York City.
