What does $300 Ether mean?
Today, Ether hit $100 (update: it’s $300 now, five weeks later). I’m sure by the time you’re reading this it will be in The Guardian and the New York Times as a curiosity piece. Our market cap will approach thirty billion dollars. By all and any standards, this is a success beyond anything dreamt of when the project started, and the money raised will continue to finance technical innovation for years to come. While the impact and worth of a technology cannot be measured by money alone, on this occasion, celebration is appropriate. We have done well.
For those of you who are new to the Ethereum show, let me explain what has just happened.
Two years ago, I wrote Programmable Blockchains In Context, the Ethereum launch post. It was a huge success, sat on the front page of Hacker News for a day, and really set the conversation and tone around the Ethereum project, without over-promising. I’ve learned a few things about explaining Ethereum now, and it’s not exactly what I would have written with hindsight, but it’s close enough that if you want the full depth chapter-and-verse on this new technology, that’s where you’d go. If you need more depth, the Ethereum Whitepaper by Vitalik Buterin, our leader, is still an absolute marvel of clarity and deep thinking. But assuming you are a more general reader, let me explain briefly what the technology is, so we can talk meaningfully about what $100 Ether means.
Ethereum is a programmable blockchain. It was created by a small team built by Vitalik Buterin, who was (at the time the project started) famously young — a CEO of a 20 person team with $18m of bitcoin in the “bank.” Many members of that team are remarkable in their own right: Joe Lubin who went from Wall St. to found Consensys Systems, a major New York company building out the blockchain future. Dr Gavin Wood, of Parity, a truly remarkable computer scientist. Dr Jutta Steiner, also of Parity. It grew into a large team, made of remarkable people, and I’m just namechecking a few. Over the couple of years the project took, the team grew, fragmented, splintered, reunited, forged ahead. The first year, the year before I joined, is truly the stuff of legends.
Anyway, that’s the cultural context. A 20 year old kid and a bunch of funny-looking villains pull together this remarkable piece of technology which, at the time, we thought was going to change the world, and now it has.
So what does it do, this programmable blockchain that’s worth ten billion dollars? Well, let me explain. A blockchain is a way of arranging a lot of computers together to do the same thing. It’s a bit like Dropbox or Google Docs or any other syncing technology that moves pictures from your phone to your laptop or whatever. The difference is that it’s syncing thousand and thousands of computers. If a few machines drop offline or get hacked, the network does not even notice: the consensus of all the machines which have the same data overwhelms the occasional drop outs. The computers form a choir, and they never forget the chorus.
This blockchain has two remarkable features. The first is the way that it pays for all those computers. On the head end of the blockchain there is a sort of roulette wheel. Five times a minute, the wheel gets a spin, and one of the computers which is helping to run the blockchain gets a prize of 5 Ether. This award is noted down in the blockchain, and synced to all of the computers in the system. The lucky winner can transfer this ether to another person (identified by their cryptographic code address) in exchange for, say, goods, services — or cash.
So this hundred dollars per Ether price that you see, that’s $500 every twelve seconds, $2500 a minute, $3.6 million dollars per day pouring out of cyberspace into the pockets of those lucky enough to have computers helping to run and sync the blockchain — the computer system which stores their winnings is paying for itself by issuing those winnings. It’s a perfect self-generating system, just like Bitcoin was before it. So that’s where the money is coming from, should you be too embarrassed to ask! For historical reasons, they call this process “mining.”
The second property of this programmable blockchain is even more remarkable. Programmability is a funny thing: when a system does a simple job, like Bitcoin (which has more or less the same mining dynamics as I outlined above for Ether) it’s easy to understand, easy to secure. But you add some element of programming to the thing — not just coins are mined and exchanged, but somehow this whole thing is software too? Well, that’s where things get complicated.
Ethereum incorporates Smart Contracts. Smart Contracts are the reason I came back into this kind of work, more than two decades after I’d been exposed to the original ideas on the Cipherpunks mailing list all those years ago. I’d left the field, only dipping back now and again to keep my perspective fresh, but when I heard a smart contract ecosystem was being built, it pulled me back out of my retirement from matters cryptographic. I came running.
A smart contract is a tool for changing the world. We have this mental model of all these computers synced together. Now imagine that rather than syncing a transaction: 5 Ether go to Bob in the reward lottery, or 22 Ether go to Helen from Fred’s account, we do something else. What is this something else? We sync software. I upload a program — needfully small, because it’s going to thousands of other machines — and we secure that syncing process using all the same sync-and-mining approaches taken to cash-only blockchain like Bitcoin’s.
Every machine in the network runs the same small program. It could be something simple, like a loan: I send you some money, and your account automatically pays it back, with interest, a few days later. If you can’t pay, a third party covers your debts, and it’s all locked in at the start — your consent, my consent, and their consent. We all agree to these terms, and it’s locked in using the smart contract. We have achieved programmable money. You might say that this doesn’t sound very complicated or impressive, but just wait and see where this goes.
What kinds of things can you do with programmable money? Nearly the entire financial system is built from programmable money. They don’t call it that, of course, but the loans and bonds and derivatives and futures and mortgages and credit default swaps and all the rest? Although at the very bottom of the stack, right in the guts of the system they might eventually be represented by a paper contract, in fact they’re represented as software for almost every step in their evolution. An individual mortgage might be a paper contract between a person and a bank, but a hundred million mortgages in the mortgage system are pure digital: software representing homes, offices, warehouses, cars, land — and more ephemeral items like airline tickets and concert tickets and even the music itself in a digital download. All of this, and more, is just software representing value, programmable money singing its songs of desire and achievement across the wires.
In short, programmable money builds the world. And Ethereum is new programmable money.
Now, as a new system, Ethereum is a little crude. Probably the longest smart contract in current use is about 2000 lines, and that’s compared to around 6 million lines of code for the F35 warplane. These are little baby steps: enough to implement a simple bond, but maybe not all the super complicated contingency management that you might get in a real paper bond contract. But in the pure digital world of the blockchain, the vast majority of the things which can go wrong with a bond in the messy real world just can’t happen. So there’s a tradeoff — simpler, kind of abstract systems which work inside of this blockchain universe, which lack the sophistication of the main financial system, versus the big old clunky machinery which occasionally runs into crises like not being able to find mortgage paperwork when house repossessions roll around during an economic contraction, because the mortgages were being moved between banks carelessly. It’s early days on this new frontier, and we are still in the trial-and-error phase of blockchain developments — we don’t know the best way to use the power of these amazing new tools, but the hundreds of prototypes done by big companies and banks make it pretty clear what the general consensus is: this tech is going somewhere.
The last piece of general magic we need to consider is this. Every bank has its own ferociously complex, and incredibly expensive and usually very delicate, computer system for managing all of the bank’s assets — the customer accounts (your money!), the bank’s assets (your house!) and all of its complex obligations to regulators, to other banks, and so on. The whole bank is in there: the bank is the software, and the software is the bank.
And the financial system is made of tens of thousands of these institutions all networked using crude, old, unreliable computer systems in many cases. Technical processes are slow, as anybody who’s ever sent a wire transfer will attest. Systems are inscrutable: when you hit a problem with your bank, it’s you who has the problem. Accountability is slow, and often painful to extract.
But the blockchain is different. Every one of those thousands of machines we referred to earlier, running their copy of the blockchain software, is a full peer. Each one carries with it all the transactions in the system, and each node can — as long as the software can carry the tune — run it’s own code. Systems like Bitcoin or Ethereum have many, many implementations. As long as they can all smoothly work together (and bugs at this level are, indeed, very rare) the whole thing works like a single machine. That nobody owns.
That nobody owns!
There is no “Bitcoin Corporation” or “Ethereum Incorporated.” There are some charities which help write the software, but the actual networks are not run by anybody, any more than the internet itself is run by somebody. The full peers, the computers which make up the network, are all owned by different people. They interact in pretty much the same way that computers interact when they are passing along email or other messages — a message can flow over dozens or hundreds of other computers before it reaches your mailbox, and those machines can be owned and run by almost anybody. The nature of the internet is that it is a network of networks: nobody owns the entire thing, everybody owns and manages their own piece, from your laptop and your cellphone, through to the local area network that manages your machines at work, up to the big fibre line installations done by AT&T. Nobody owns the internet, and we get along just fine.
So to recap, this crazy little system that was launched only a couple of years ago, that mines its own currency through a strange lottery system, that stores little programs which represent financial instruments or games of chance or skill — or whatever programmers want them to represent — this little system is trading at $100 per ether, or nearly $10 billion dollars?
Now let’s try to understand why.
Bitcoin is Ethereum’s parent. It’s a bigger, older, surly beast, much beloved by non-State anarchists and American libertarians. It was built on a promise of issuing a sort of digital gold, a central bank of the internet, a new reserve currency backed by pure mathematics. It was intended to be fully decentralized, with all that tricky “mining” work we talked about before done on everybody’s home laptops, scattered all over the world for security.
In practice Bitcoin has fallen a fair bit short of that. The mining thing rapidly centralized in the hands of a relatively small number of miners, and the initial hard line Libertarian position softened as taxes needed to be collected and paid, and the original bold vision came up rather short in contact with cold reality. But this was not to say that Bitcoin was a failure in any way, shape or form: the ideas behind Bitcoin certainly ran into trouble as they encountered regulation, but the actual technology and all-important community adoption soldiered right on. Tonight, while Ether passes the $100 barrier, Bitcoin hovers around $1700 for a total of more than four times Ethereum’s total market value. Bitcoin is also succeeding. It’s being used for buying coffee, buying pot (notoriously, on the dark markets), and making international money transfers for bargain basement prices. It’s the face which launched a thousand ships (altcoins), some of which have also recently broken the billion dollar total coin value threshold. Bitcoin enables trade, as simple as that, and understood in these terms is an unmitigated success.
Ethereum never had that kind of clarity of political purpose. The team tended towards a mild left-green bias, that I might unfairly summarize as “radicalized Guardian readers” with, of course, a few outliers. I certainly fit that description. The general bias of the project has always been to get things done, and let the future figure out what the tools are for. We talk about decentralization, perhaps as a proxy for freedom or at least economic freedom, and we think the ownerless nature of the network is inherently a good breeding ground for democratic ideals. But there probably isn’t, and never was, a single coherent political ideology behind Ethereum.
Rather, there’s a vision about the future of society and global trade. I’m going to try and articulate that vision for you now.
Right now, when a group of people want to get something done, usually they put somebody in charge. That person is sometimes a leader, and sometimes a facilitator. The facilitators are theoretically neutral parties which are just there to get the job done, on behalf of the people they serve. They should be, ideally, neutral functionaries. The leaders we pay to have informed opinions which are better than our own ideas, but the facilitators we pay to be neutral voices. But in practice these facilitators are often so powerful that they apply pressure to the whole of society, and in fact often step in and usurp the jobs which should be left to leaders: corporate lobbyists pushing agendas on our elected officials, for instance. The result is a world in which nearly any organization which truly enjoys economies of scale — from a national grid through to Wal-Mart — will tend to reconfigure the environment in ways which make it more profitable. We create these giants in the name of efficiently serving our needs, but they wind up ruling over us as if we had elected them with every dollar of our spending.
I believe the Ethereum vision of the future of the human race is different. Rather than constantly being hassled by our intermediaries — from Google through to the Department of Motor Vehicles — the idea is to disintermediate and deal directly with our neighbours and friends and strangers alike, to get the job done ourselves. Some people called this disintermediation — a direct relationship between two people without a middleman. But I think the correct emphasis is not on what we are taking away (the intermediaries) but on what we are creating: direct communications between people, which are capable of storing and transmitting economic value.
Now that is a bit of a mouthful, so let me break that down to the basics.
We have this programmable blockchain. It’s a computer system made up of lots of computers scattered all over the world. Different people own those computers. Different software runs on those computers. But all these people, machines and software collaborate to create a secure system which generates value in the form of digital tokens called Ether. People can transfer value and make simple contracts on this machine made from so many diverse elements.
Some would call this system disintermediated. But I prefer to think of it as direct. Yes, there is an intermediary between you and I if we trade on this system: in fact there are many intermediaries — every miner, every person writing the software, and all the internet providers and so on along the way. But, unlike the banking system, the intermediary in the Ethereum universe has no agenda: it doesn’t make policy. It doesn’t make rules. It doesn’t surprise you with unexpected fees. It doesn’t change the rules of the game between you kicking the ball and it arriving in the goal. The intermediary in Ethereum is transparent: it simply serves to carry out your will, your instructions.
And this is the core vision of the Ethereum community: a world in which two people can deal directly with each other, and the systems that support their interaction don’t distort the message as they carry out our instructions. You say what you want, and the machines carry your instructions to the person on the other end of the deal. Directness is the real fruit of disintermediation: people dealing as they would face-to-face, but with the benefit of a network.
I went to Norway recently, and I suggested at a talk I did that we could move Scandinavia very quickly to experiments involving a blockchain for payments, fully supported by their government, on the basis that taxation could be built directly into the platforms they might use (it’s unlikely, today, the Norwegian government could collect taxes in Ether not Kroner!). In a system like this, the social contract of the country would be represented directly in the medium-of-exchange: a 15% cut to run a welfare state and provide world class healthcare to everybody is as natural to that environment as a fully-transparent end-to-end system with zero taxes feels to Libertarians. The precise configuration of your payment systems implements your social values, and this is an enormous lesson for all of us: there is no neutral medium, only one that shares your values, which you then perceive as neutral.
So here we are, at (or perhaps just slightly under) $100 USD per Ether. I promised you I would tell you what it means.
It means that enough people are rallying around this vision of the future, and putting their money on the line for it, that the core development teams and entrepreneurs building that future will be funded more-or-less indefinitely. It means that there’s a massive wave of product innovation as people try to figure out how to get the millions of Ethereum users to spend their money on our products, and that evolutionary process builds further into the potential that the Ethereum system has to satisfy real human needs and desires. The system is learning to take care of us. Without arbitrary interference by middlemen, it may be quite a rapid adaptation.
On a personal note, I pushed very deep into the theory around Ethereum and Direct Trade (Decentralization) since Ethereum launched. I came back with three fundamental results.
- The Dubai Blockchain Strategy which set one of the most innovative nation states in the world on a new track relative to this technology, which was then backed up in Dubai by a second piece of work (in collaboration with Consensys),
- The Internet of Agreements, which I’ll discuss more below, which pulls together many of the loose threads in the Decentralization discussion into an easier-to-express whole.
- The Harvard Business Review pieces, which expand in many directions, including Globalization 2.0 (blockchains to protect world trade during deglobalization) and a rather wonderful (unpublished!) piece on Leapfrogging to blockchains in the developing world.
No ICO, and no blockchain startup (per se) for me. Why not?
I decided, on close examination, that the weakest link in the ecosystem was the willingness of broader society and mass culture to pull us into the mainstream. While I could be deep in the tent doing financial architecture or designing business models for new ICO projects, where I wanted to be was on the periphery, perceived as being “in the real world,” building on ramps for blockchain projects to break out of the microculture they currently exist in, and get all the way into the mainstream. I’ve supported quite a few projects from mostly behind the scenes, though.
I’ve also built up a very, very solid stack of theory which is being packaged as concepts like the Internet of Agreements. I hope this framing of our work will stick to the mainstream and make it far, far easier for us to build this future together with the main productive forces in society (rather than being set up in false opposition to them — the worst mistake that Bitcoin made!)
I phrase it like this:
- In the beginning there was the Internet of Ideas, back before…
- Online credit card processing gives birth to Amazon and the Internet of Shopping
- Blockchains bring the rest of our financial instruments online beside the credit card, giving rise to the Internet of Agreements. The internet finally gets a native representation for deals that is better than emailing PDFs back and forwards.
The Internet of Agreements is a pretty simple concept: two (or more) people negotiate a business deal. There’s a computer in the room, a bit like Amazon’s Alexa, to take notes. When it’s pretty sure a deal has been done, it displays the terms to the participants to fine tune, and if they agree, a smart contract is prepared which reflects those terms. Of course that’s an AI problem, and a hard one. This part is a little futuristic. But I want to look forwards about 10 years, and in that time frame, all this seems possible. And of course, on the back end, robots and self-driving cars and automated warehouses and factories do the majority of the work. I think this kind of relationship between us and our machines is more-or-less inevitable. I think of this as a picture of what it will all turn into when it grows up, much like Ted Nelson’s concept of Hypertext guided internet development for many, many years. To me, the Internet of Agreements is a simple image of where we are going, and is a vision we can all get behind. Almost nobody disagrees with the Internet of Agreements as a goal, and it seems to meet the inevitable curve of both technology and society.
The Internet of Agreements gave me what I was looking for: a largely technologically-neutral and politically-agnostic goal state. It’s naive to say that politics don’t matter — they do, they’re vital. But at a 10 year horizon it’s so difficult to imagine how things will be, and debates of today will be seem long-settled by then. Important technical hurdles remain, including Proof of Stake and the entire Scaled Blockchain debate. I don’t know, and I don’t want to second guess, exactly which technological solutions will work out best: Ethereum must speed up, but I don’t want to specify exactly how I see that happening, because I am unsure. I wanted something that I could drive towards that was simple enough it could be explained casually, broad enough that most of our emerging technologies in trade facilitation could fit in somewhere, and far enough away that nobody was going to argue too much about the precise details. In short, I wanted a vision. Not a road map of the next two or three years, looking at lightning networks and snarks, but out 10 years, out when all is said and done.
I think Ether at $100 means that so many people believe in the world they think Ethereum will create, that it is becoming inevitable. I suspect that the full implementation of that vision will be a lot more humane and user-friendly than most of what people are thinking about right now, and I suspect that a settlement of the issues around nation state law and smart contracts will be settled by automated compliance checking (i.e. smart contract testing by regulatory oracles) rather than by wholescale end-runs around democratic sovereignty in favor of libertarian ideals. I don’t know that for a fact, but that guess is also built into the Internet of Agreements model of the world.
Regardless of how the technological details are worked out, I am more convinced than ever that the smart contract ecosystem is here to stay, because people want it, they need it, and it solves problems they face regularly. It may well be used by ordinary people 50 times a day without ever realizing they have touched it. The coffee is hot and waiting for you when you arrive in the coffee shop, your lunch has a picture of the person who caught the tuna with a fishing line printed on the side, the solar panels are gleaming in the sun, and the computers are matching the supply to demand at the right price. That’s the vision of the smart contract world: stuff just works, because the computers just work. And that’s what we are building now.
So right now I’m at the next frontier. I’m building a new set of concepts, called Humanizing the Singularity, to help us navigate these tricky waters. That’s similar to the work I did on explaining Ethereum and teaching people ways to explain it. The Internet of Agreements and Globalization 2.0 explain the blockchain and associated futures in a simple, easy to deal with package. Later this year, Autumn, we will have a big Internet of Agreements conference to push the field further, really pushing on bridge building between blockchain and AI, and blockchain and advanced logistics solutions. Shortly after that there’ll be a paper or two on AR/VR, and an attempt to make sense of that field in a way that lets people get to grips with it faster. Then in 2018 there will be the long-time-coming strategy on AI. The blockchain weaves through all of these areas, like the internet itself, giving persistence to virtual property, flagging ownership of drones or robots, and giving AI problem solving a way to interact with the real world.
Now, a final word on the ICO situation.
I’ve always tried, often unsuccessfully, to be a voice of conscience in the Ethereum community. Right now I see a lot of very good ideas attracting huge amounts of funding very fast, and that’s great. And if that was all that was happening, that would be great. But the more of a mess people are making with legal shoddiness, technical ineptitude or carelessness, and improper handling of investor interests or identities, the worse the mess is going to be if it all has to be untangled. If this ecosystem is to stabilize, it will be because people ran a tight ship, did exactly what they promised to do, got the details right, dealt sensibly with regulation where applicable, and gave good value for hard-earned cash. I want to sound that note of caution now: I was right to feel uneasy about the original DAO, and did not speak out loudly enough. Self-governing is good, but it must be maintained at the highest standards of ethical integrity to hold up in the long run.
Much as I’d like to raise $100m in 24 minutes in an ICO to re-invest in building out the core technologies to connect Ethereum to everything else, I just can’t see a way of doing it that gives us the flexibility down the line to make the decisions we need to. So I’ve started a very conventional venture capital firm to build these technologies, and others. I hope to see you further down the line!
Take care, enjoy your profits, and good night.