Blockchains and the future of the internet
What is blockchain
Simply put, a blockchain is a distributed ledger of entries across a network of several computers. For any entry on the blockchain to be considered valid, a majority of the systems in the network must approve it, and then that entry is recorded across all computers in the network.
A description of blockchain that I most relate to, is
A blockchain is effectively a computer that can make commitments
As all the computers in the blockchain network provide shared memory (of all entries) and a common answer (which entry to be recorded); it effectively acts as a computer. Further, because the outcome (which entry to record) is completely algorithm-based, one can argue that the blockchain is providing a commitment, that it will follow the algorithmic rules forever, and without deviation.
Ok, but what is all the fuss about?
Based on the above understanding, we can already outline three big advantages of the blockchain:
2. Security: Because the blockchain ledger is distributed instead of maintained by one entity, it is immutable — and much harder to hack, as one will have to hack into and change the entries in several computers in the network to be successful.
3. Tamper-proof: Because of the blockchain’s decentralized and algorithm-driven nature, it is nearly impossible to, for e.g. deny a transaction on someone’s whim — something that centralized institutions like banks can do.
An important aspect of the crypto/ blockchain is the “token”. A Token is the store of value in the blockchain — Bitcoin and Ethereum are the most popular tokens currently. Computers in the network are incentivized to participate by giving them tokens for providing their computational and storage capacity. Developers who build applications on top of these blockchain platforms also aim to earn some tokens as payment/commissions when users transact through their application. Through these tokens, value is woven into the fabric of the blockchain. Also, given tokens are common across the platform, developers and users — they align all players to the common goal of “increasing the value of the token”.
This brings us to a fourth advantage of the blockchain:
4. Seamless value-transfer: If the internet was all about seamless transfer of information, blockchains can unlock seamless transfer of “value”. While existing financial apps (Paypal/Venmo, Revolut, India’s UPI-apps) do provide an ‘acceptable’ money transfer experience today; blockchain has a potential to provide 10x improvements in this field, and in completely new ways. Today, if one has to make payments available on their app, they need to have integrations with Stripe (with the user experience involving switching to several pages), and several other payment gateways as one expands geographically. Compare that to a blockchain app, where the experience is as simple as sending a whatsapp text message for users, and just incorporating a few pieces of open-source code for developers. Of course, this seamless borderless value transfer is especially useful in cross-border remittances and payments to the underbanked.
Let’s illustrate these advantages through a fictitious crypto social network based on a blockchain.
- Users can “trust” the computer-driven commitment that the privacy of users will be maintained as promised, till eternity.
- No individual/ organization will be able to influence the network and arbitrarily censor any content.
- Compensation for developers to build new features on top of the crypto platform will be transparent and won’t change in the future. This will provide programmers the confidence to build new things, and investors to back them.
- Users will have a “vote” on what new features are released, and full transparency on what that would mean for them and the network.
- Most importantly, the developers of the network will have a novel way to solve the “cold start problem”. By leveraging the token and providing them as incentives to the early users, they can quickly build early traction for the network without high upfront investments. If the network gains mass-traction, these token could become very valuable for the early adopters. One can almost draw a parallel between these tokens to early-adopters and ESOPs to early employees.
- In fact, tokens/ monetization can be ingrained in the network in an even deeper way. Instead of rewarding great content producers with just recognition (more followers, likes and upvotes), one can actually reward great content with tokens depending on the number of upvotes they receive. This could be a powerful evolution from just social networks to socio-monetary networks where users don’t just “own their data” but can “own and monetize their data”. Of course, platforms like medium exist where users can monetize their content — but they might become inferior to crypto social networks. Medium might suddenly change the creator compensation structure, there is a lag between the recognition (views/ subscription) and the value transfer (compensation frequency).
So, blockchain should explode really soon, right?
Well, yes — in a way, the revolution has begun. But it might take longer than a few years for it to be mainstream. There are several engineering problems to be solve, before blockchains can really blow up.
- Speed: Crypto platforms today, are really slow. For example, Bitcoin can manage only 7 transactions/ second; Ethereum does better but still caps out at 25 transactions/ second. In comparison, VISA can do almost 3,000–5,000 transactions/ second — almost 200 times faster!
- Energy-efficiency: Bitcoin has received a lot of flak for being extremely unsustainable from an energy consumption standpoint — Bitcoin mining consumes more energy per year than the country of Argentina! Making crypto more energy efficient is a major engineering problem that is garnering a lot of interest from computer scientists. One way to resolve this, is by changing the consensus mechanism. Bitcoin follows a concept called “proof of work” to run the computations and reward miners. This involves getting bitcoin miners to solve complex codes. New less inefficient concepts like “proof of stake” and “proof of space” have already been developed and utilized.
- Space is expensive: The cost of storing something on the blockchain is (and one can argue will always be) much higher than storing on, say, an AWS server. This means one can’t and should not use the blockchain as just a database for storing anything. It should ideally be used only in cases where one needs a high-trust decentralized computer.
- Not developer-friendly: Because blockchain is still in its nascent stage, developers need to code across the full blockchain stack from scratch. But as blockchains mature further, developer-friendly interfaces and application-layers are being built. Several blockchain primitives have also emerged, which help developers add basic functionalities by just copying pieces of code, instead of reinventing the wheel everytime. This will help in attracting the interest of more developers to the fray.
Today there are so many tools available for anyone to have a functional website up and running, and share it with several people in less than an hour. But in the early days of the internet, when IP was just developed, internet enthusiasts had to code websites from scratch, and because domain names weren’t invented, had to share IP addresses of their webpages. We are still in the early-internet era of blockchains, but with two key differences.
- We have seen the internet unfold, and hence know the power of what a new revolutionary technology can do.
- We already have an army of coders and developers who would be able to ramp up quite quickly on blockchain application development.
For these two reasons, I predict that the blockchain revolution will unfold a lot faster than the internet revolution. In fact one may argue, that Bitcoin has already seen two big speculative bubbles pass, quite like the dot-com bubble of the 90’s but in a shrunken timeline.
Who will win in the blockchain ecosystem?
It is extremely difficult to pick winner, because the ecosystem is extremely nascent, as (1) currently the hardware and network layer is just getting built for scale, and (2) a lot will hinge on regulatory intervention, and their cards have still not been revealed. Just like web1.0 and 2.0, there are going to be several winners — at the very least one infrastructure (+token) player and several applications built on top of it.
One necessary condition into winning as a blockchain token will be the ability to attract developers who believe in the platform and the potential of the token. So blockchain platforms need to invest in being developer-friendly in terms of flexibility to build on top of it, ease of building on top of it, and the potential returns from building on top of it. However, an important thing to note here is, that all of the platform code is open source. So it is easy to copy — and a beautifully written code is not a differentiator. What is “defensible” is a combination of great functionality and “network effects” which starts turning the flywheel of getting more developers — > users — > investors. Since users typically lag developers in the early stages, tracking the latter is still the best way to identify potential winners.
In addition, whoever manages regulatory/ legal uncertainty well, will have a solid advantage. Not being agile to regulations could wipe billions of dollars off the fortunes of the token.
Notes and Sources:
I have just touched the surface of blockchains in this article, and I have relied heavily on several sources to sharpen my understanding. I am mentioning links to the key sources below. Also, a special shoutout to Andreesen Horowitz (a16z) and their “The State of Crypto” series for sharing such rich and relevant content on this topic.