In the previous chapter, we compared Bitcoin to the internet, and at a high level gave you some mental models via which you could better understand why Bitcoin has grown so fast, and how it will continue to strengthen over time.
In this chapter, we’re going to explore some basic fundamentals about networks.
Networks are another inherently non-intuitive area for humans to
grasp. Throughout history, we’ve been extraordinarily poor at predicting the growth of networks; especially those which become a public commons, such as electricity, the telephone, the internet and now Bitcoin.
“WHEN THE PARIS EXHIBITION [OF 1878] CLOSES, ELECTRIC LIGHT WILL CLOSE WITH
IT AND NO MORE WILL BE HEARD OF IT.”
Erasmus Wilson, Oxford professor
“THE AMERICANS HAVE NEED OF THE TELEPHONE, BUT WE DO NOT. WE HAVE PLENTY OF MESSENGER BOYS.”
Sir William Preece, Chief Engineer, British Post Office, 1878
And my favourite:
“THE GROWTH OF THE INTERNET WILL SLOW DRASTICALLY, AS THE
FLAW IN ‘METCALFE’S LAW’ BECOMES APPARENT: MOST PEOPLE HAVE NOTHING TO SAY TO EACH OTHER! BY 2005 OR SO, IT WILL BECOME CLEAR THAT THE INTERNET’S IMPACT ON THE ECONOMY HAS BEEN NO GREATER THAN THE FAX MACHINE’S.”
Paul Krugman, winner of the Nobel Prize in Economics, wrote in 1998
How do the so-called “experts” get it sooo wrong?
There’s a number of reasons; a lot to do with biases, and a big one to do with how we’ve evolved.
I delve deeper into this in the following article:
Homo Sapiens, Evolution, Money & Bitcoin
How a strange species of ape went from Barter to Bitcoin. An Essay.
Although the cliff notes are as follows:
Humans evolved in a world defined by our more linear sensory perceptions.
Growing up in the Savanna; you had to know roughly how long it would take you to run x-distance in order to steal some food, protect your family or outrun a predator.
As a result, we’re great at estimating how far 30 linear steps will take us (roughly 30m).
30 exponential steps is a completely different story. That’s 1bn metres, which is a distance we can’t easily fathom — Peter Diamandis and Ray Kurzweil really popularised both this term, and the example.
When we encounter something that moves exponentially or via some network effect, we find it hard to make accurate, intuitive estimates. We generally project linearly, whether over or underestimating.
Note: network effects are similar in nature to exponential, just not as pronounced — the key takeaway is that in the early stages, their progress is imperceptible. Network growth seems to move slow as the initial base of connections is established. But once it hits a critical mass (inflection point), the momentum to continue is almost unstoppable; barring a catastrophic failure of the network itself.
This inflection point is probably not a “point”. It’s more like a period — and without hindsight; it’s impossible to measure and therefore forecast, but as a rule of thumb, or a heuristic; you could probably bet that it’s the point where people give up and think it’s not going to work (because of the lack of surface level results) that a functional network which has continued growing it’s node- base; takes off.
The image above is not meant to be mathematically accurate, but designed to illustrate the following point:
- We overestimate in the short term (“Bitcoin will take over the world”)
- We underestimate in the long term (“Bitcoin is dead..it’s been 10yrs”)
Note: exponential and quadratic curves look similar in those earlier stages — but they are different.
The following diagram and example will help you better understand how networks (also known as quadratic growth) can really accelerate beyond a certain point:
The connections build up — and by the time you get somewhere between 1000–10,000, the network has well & truly taken off. See below:
Lightning has currently around 3500 visible nodes (as of 18th Feb, 2019), and likely the same amount (if not more) that are private.
Something to think about, particularly for the naysayers.
Dumb VS Smart
There is another reason why the internet won out as the primary communications network, and not the private consortiums / networks like AOL or the telecommunications companies who dominated the communications infrastructure for 100yrs prior.
It’s because the base layer needs to be “dumb” — or in other words basic and robust for it to work best.
The internet was built on a few basic packet switching and routing protocols, which did what they did very simply but very well — and created the most robust communications network our species has ever seen.
As a result, it incentivised the rest of the world to build on top of it. Why?
Because when you have a solid, robust foundation, you can abstract any function and you can deliver services which can later interact and integrate with other services. This cumulative effect is another function of how networks (such as the internet, and now Bitcoin) accelerate, further entrench themselves and dominate.
All of the economic activity will go to where it can maximise its yield and the more complex and all-inclusive you try to make a foundational network (especially something as broad as communication or money), the less room there is for free market / open innovation, AND, the more of a threat there is from competing networks to develop something that’s more basic and robust that the COLLECTIVE can build on top of.
Blockchains are dead because they’re either useless or contain unnecessary complexity, and private ones in particular simply cannot build a flat, open base for true network effects.
Their two major selling points; security and immutability are not some inherent, magical trait that emerges thanks to their technical architecture; or their segregation of data.
The only networks that have this are open, public, game theoretically sound networks such as Bitcoin; and perhaps a few others, although Bitcoin has
a significant advantage — and in the game of networks, when you have the lead combined with the serendipitous beginnings, the stubborn minority, the most infrastructure and the best minds working on it; the probabilities of catching up, let alone keeping up; fall exponentially.
I posit that it’s too late to catch bitcoin. At least this century. It’s time to double down on the bet and not wonder why you got left behind. And for those of you who think “no bank is ever going to use Bitcoin as a settlement layer”, just remember:
In the 90s, every bank was saying they would never do any form of banking on the internet.
Times change. And you can either play catch up, or you can lead.
Investing in Networks
Another reason why Blockchain has and continues to fail is because
its focus is on being a ‘proprietary technology’. There is no network effect in building private blockchains or “DLTs”.
That’s called incremental (or in a lot of cases; phantom) innovation. The real investment opportunity and innovation lies in the development of networks such as Airbnb, Uber, App Store, Facebook and the network which was the game changer for everyone; the Internet.
If you look at society you find that the sub-strata upon which everything is built is communication, information, language.
The first layer that sits on top of that is actually money. Most people don’t appreciate the importance money plays in the evolution of our species and our ability to build this thing called society.
I’ll touch on Money briefly in a dedicated section later so that you appreciate its gravity.
For now; suffice it to say it’s fundamental to the operation of everything in society, and is core to our ability to cooperate and collaborate as humans (Homo-sapiens specifically).
Currently the only digital monetary medium that is anti fragile, robust and secure with a truly scarce unit of account is Bitcoin. Is that not a network worth investing in or building on top of?
If you want to be an investor that invests in incremental innovation that will just be taken over tomorrow, you’ll be continually looking for the next best thing. The alternative is to use the Peter Thiel / Reid Hoffman approach: look for networks that are gaining moment, that have a dedicated, stubborn minority, which despite bad press, continue to grow — and you’ll find the 1% which change the world.
As Mark Andreesen said years ago; “Software is eating the world” — and it still is. As an investor, you need to decide whether you want to be a part of the blockbuster world, or whether you want to be streaming in the new world.
Innovations that benefit from time and network growth only get stronger as more activity happens on them.
Email helped bring more activity to the internet, Lightning and simple multi-sig, time lock and “judge” smart contracts will help to further advance Bitcoin’s network effects.
The digital, “neo” banks are out there trying to put lipstick on a pig by making an old infrastructure more modern — and it’s difficult — it’s like trying to make a horse and carriage faster.
Messing around with legacy baking, whilst we have something like Bitcoin is madness.
Bitcoin is the only secure global digital settlement network upon which real digital and neo banks can be built with far greater integrity, complexity and transparency — and the same way we didn’t know what sort of applications were going to emerge by liberating information and communication
with the internet, so too we have no idea the magnitude of changes and innovations that will emerge when we liberate money and value exchange in a digital world.
No — this is not an overnight transformation, but make no mistake about it; the next Amazon, Google and Netflix’s of the world are being built right now — on the next great, public, global network: Bitcoin.
In the next chapter we’ll start to explore Lightning as a second layer protocol on Bitcoin. Lightning is the solution to a number of the perceived “problems” such as throughput that Bitcoin apparently has (which are not problems, they are design choices that allow for intelligent scaling & growth, while maintaining it’s base layer guarantees).