7 Thoughts On Blockchain, Cryptocurrency, & Decentralization After Another Three Months Down The Rabbit Hole

Tyler Durden's picture

Authored by Lou Kerner via HackerNoon.com,

Everyone’s ADD, including me. I get attracted by shiny objects. I first noticed Bitcoin as a shiny object in mid-2013. I went down the rabbit hole far enough for The Wall Street Journal to call me “Wall Street’s Bitcoin expert” while they live blogged a Bitcoin conference call I hosted. I invested in ChangeTip. I bought and sold BitcoinWallet.com. Unfortunately, by late-2014, nine months in to a severe Bitcoin price decline, my focus wandered to new shiny objects.

Fast forward to 2017, and my mind wandered to a new shiny object, ICOs. Once again, I got the four smartest people I could find on the topic, and held a conference call on June 29th during which I had my crypto epiphany.

Crypto is now so shiny, so luminous, I can’t divert my eyes. I’m living and breathing crypto 24/7. Reading every thoughtful post I can find. Meeting anyone thoughtful on the topic. Holding more crypto conference calls. And writing and writing on crypto, because that’s the best way to learn.

After 3 months going down the rabbit hole a second time, here’s what I learned...

1. I’m A One Eyed Man In The Land of Other One Eyed People

We’re still so early, that much about what people are saying and writing about crypto is more theory than fact. Lots of people (including me) compare the the crypto bubble to the Internet bubble. But the parallels between the development of crypto and the development Internet are everywhere I look. Take this snippet from Wikipedia’s “History of the Internet’’:

“With so many different network methods, something was needed to unify them. Robert E. Kahn of DARPA and ARPANET recruited Vinton Cerf of Stanford to work with him on the problem. By 1973, they had worked out a fundamental reformulation, where the differences between network protocols were hidden by using a common internetwork protocol…..”

As a non-techie, that sounds exactly like a paragraph I read yesterday on Medium. But an important difference about the evolution of crypto and the evolution of the internet is how public crypto’s early evolution is. There were maybe a few thousand people who cared about what Cerf was doing in the early days of the Internet. So it was done out of the public’s eye. It wasn’t until 1994, 21 years after Cerf’s 1973 solution, that Netscape introduced it’s browser, and most people learned about the internet.

Crypto is evolving in its early days in a public way, so it’s messy, and theoretical, and dense. So if you feel like you don’t really understand crypto, join the crowd. Neither of us would have understood much if we sat in the room with Vint Cerf in 1973.

 

Another sign that it’s early is that foundational parts of crypto theory like Joel Manegro’s Fat Protocol post , which has been repeated ad infinitum, is being questioned and rethought by Teemu Paivinen, Jake Brukhman and others (h/t Yannick Roux).

2. Bitcoin Is A Confidence Game, Utility Tokens Are Awesome But Legally Challenging, Security Tokens Are Going To Be Huge

The chart below provides a simple way to think about the three types of cryptocurrencies.

On the currency side, while Bitcoin is a crypto leader in payments, it’s rise in it’s value has little to do with the currency applications of Bitcoin, and all to do with it being a store of value. Therefore, Bitcoin is simply a confidence game as are ALL store of values. As with other assets, the higher Bitcoin’s value goes, the more confident investors become, which is another factor driving bubbles. After being used as a store of value for thousands of years, it’s easier to believe in gold as a store of value (hence the rocks have a total market cap/are storing over $7 trillion in value vs. $75 billion for Bitcoin today). I believe Bitcoin will continue to gain share of value storage. I’m a HODLer.

Utility Tokens like Civic which provide a digital good in return for the token (in Civic’s case they provide businesses and individuals the tools to control and protect identities) are an exciting new way to fuel ecosystems. However, in the SAFT White Paper published by Cooley and Protocol Labs last week, a whole section is titled “Pre-functional Utility Token Sales Are More Likely to Pass the Howey Test”, which is another way of saying the SEC is likely to deem them a security. Hence they propose the SAFT as an instrument to address this risk.

The third type of token are Security Tokens, which are similar to shares, as they convey ownership interests. The cool thing about Security Tokens is that they’re liquid (assuming there’s someone who wants to buy them and security laws are addressed), and companies can access a global investor base when raising capital/doing an ICO. While most of the ICOs to date have been Utility Tokens, because of the massive advantages that Security Tokens have over traditional capital raising, I think the total market cap of all security tokens will be much larger than the total market cap of all utility tokens.

3. Blockchain Technology Is Going To Be A Disruptive Force Across Industries

This post in Blockchain Hub gives a great detailed overview of the three types of blockchains? - ?public blockchains (like Bitcoin and Ethereum), federated blockchains (like R3 and EWF), and private blockchains (e.g. platforms like Multichain).

This post by CB Insights highlights 30 industries that blockchain could transform, and the companies leading the disruption.

This TED Talk is the best explanation of why Blockchain is going to change the world (spoiler alert… it’s about trust).

4. DECENTRALIZATION Is Potentially The Most Disruptive Force

Blockchains, cryptocurrencies, together with other smart contracts are enabling Decentralization, which is the REALLY disruptive thing.  The chart below is widely known in crypto. It’s often disparaged as too simplistic to be meaningful, but I find it helpful.

Governments and businesses have largely functioned via centralization. Someone or some organization sits in the middle, making the rules, and taking a toll (either taxes or fees) for providing a function. We can now leverage technology, take out the middleman, and enable highly functional decentralized entities (like bitcoin).

Take life insurance. I believe, in the future, through smart contracts and the blockchain, decentralized structures will provide life insurance, saving buyers of life insurance the $10’s of billions of tolls (sales commissions, profits, …) that insurance companies takes for sitting in the middle.

ICOs are funding a growing list of real-world decentralized companies. Augur is building a decentralized prediction market. PROPS is a decentralized economy for digital video. OpenBazaar is a decentralized peer-to-peer marketplace. Aragon is a decentralized provider of tools to enable more efficient decentralized companies.

Decentralization is the lens through which I now look at everything. It’s the most important thing I’ve learned about over the last three months.

It seems to make sense that, all else being equal, the industries most at risk for disruption from decentralization are where the middlemen charge the highest tolls. Below is a list from Forbes of the 10 industries with the highest net margins in 2016:

Even though investment managers are getting disrupted by ETFs and robo -advisors, they’re still churning out nice margins. Certainly my own industry (venture capital) is at risk:

But I don’t think VCs aren’t going away anytime soon, particularly VCs that focus on crypto and invest in ICOs. In addition, ICO investors see name VCs as a positive signal (e.g. Filecoin). So VCs may be diminished, but the good ones will adapt and innovate.

To learn more about decentralization, read Vitalik’s “The Meaning of Decentralization” which goes in to the the three different dimensions of decentralization:

5. It’s A Bubble….So What

The biggest sign that it’s not a bubble, is that almost everyone says it’s a bubble. By way of background, I’m a VC and former Wall Street equity analyst, and I think it’s a bubble because I see ICOs trading at 50X-100X+ what I think they would be valued at if they were funded by VCs or traded publicly. And history says it’s not different this time. Here’s a great book on the last 800 years of people saying “it’s different” this time to justify lofty valuations.

I say “so what” because I believe in Amara’s Law: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. This is part of the reason we get bubbles. We get overexcited about a new technology and we drive up prices beyond any reasonable valuation. Bubble’s go on for years. The internet bubble lasted 5+ years.

But the more important part of Amara’s law is that we underestimate the effect of a technology in the long run. The internet is more impactful, and a greater wealth creator than anyone imagined. The internet brought us $3 trillion of wealth just in FAMGA. What’s the value to be created from crypto, blockchain, and decentralization? Today, the cryptocurrency market cap is around $150 billion. Could that figure go down 78% like the NASDAQ did in the 30 months after it peaked on March 10th, 2000? Sure. And that would be painful. But I’m playing the long game. It was a good strategy with the internet, and it should be a good strategy today with crypto.

6. Governance Is The Biggest Risk To Bitcoin

Regulatory risk is obviously significant on a country-by-country basis, or within the U.S. on a state-by-state basis re all cryptocurrency. We’ve seen what happened in China. Korea and other countries are also clamping down. In the U.S. the SEC DAO Report was a big step forward for ICOs given the incredible amount of detail and guidance the SEC gave in the report, without it being an enforcement action. Crypto’s next on the SEC agenda on October 12th. But at the end of the day, governments are going to do what’s in their best interests.

While there is significant regulatory risk, I believe governance is the greatest risk to Bitcoin and other decentralized entities. Bitcoin is essentially governed by exit (h/t Ari Paul). While there’s a consensus mechanism, if people don’t like the consensus, they have three choices. They can 1)suck it up, 2) they can sell their bitcoins and leave, or 3) they can take the open source code and fork it. Forking comes with both technical risk and community risk. The Segwit2X debate, which could result in a hard fork November 18, is just the latest example of Bitcoin’s risk from governance by exit. The Balkanization of Bitcoin won’t be a good thing for the community.

7. Don’t Hate The Haters. Love The HODL’ers

After Jamie Dimon said “Bitcoin is a fraud”, my Twitter stream was filled with Dimon haters. I read what he said, which brought nothing new to the conversation other than his opinion, and moved on. Maybe Dimon doesn’t even believe what he’s saying. Maybe he’s just talking up his own book. I don’t know, I don’t care, and I won’t spend time defending the industry from haters or dissecting the reasons the haters hate (unless they’re bringing something new to the conversation).

I want to spend my time preaching to the choir. I want to spend my time learning from, helping, and investing in the believers. As an industry, we have a lot of work ahead of us to achieve the massive world-changing potential of blockchain, cryptocurrency, and decentralization. I’m getting to it.

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VD's picture

while i dont agree w/ it fully, this is fantastic read on crypt0:

 

https://blog.chain.com/a-letter-to-jamie-dimon-de89d417cb80

11b40's picture

So, does this mean an apology to TM? Is the mental light bulb starting to glow?

VD's picture

tmoron is classic useful idiot pumper bagholder. and did u not notice that i said i don't agree w/ it all; namely, it's not a decentralized asset class, but, rather, decentralized units of payment specifically in btc's case. from there you can better extrapolate my position.

tmosley's picture

Hahaha, what a tiny little man you are.

IH8OBAMA's picture

"...there is significant regulatory risk"

I think government will wait until the next major price crash.  Hurting, people will write their Senators and Congressmen and ask why it wasn't regulated.  Why they lost their life savings.  Why such unregulated volitility was allowed to exist.   That's when the government crack down will come and it will be massive.

 

tmosley's picture

Ridiculous. Bitcoin crashes all the time. The difference is that it comes back.

If the government cared about people's life savings, they would investigate silver manipulation. Actually investigate it.

LostandFound's picture

This will be the governments last chance to try and crack bitcoin when the next correction kicks in, accordingly we are coming to the 5th Wave in price increase, and the correction could be stomach turning and of course the mainstream will jump on it. 

For me, i hope the correction is a shocker, this is when i will buy. 

fx's picture

Blockchain tech is great. And will revolutionize whole industries. The pity for cryptocurrency holders is, the blockchain can do all this without needing bitcoins, Ethereums, litecoins etc. The "currencies" attached to the blockchain are absolutely not necessary for the technology to work. Ask anyone who already does realworld industry applications for banks, utilities etc. with Ethereum and others and they will confirm to you that the  "currency" is totally irrelevant to them and these projects.

Cryptocurrencies are a hot air bubble. Period. Guess what, I play along, but I am fully aware that they are a bubble and that their ultimate value is about zero. But hey, if bitcoin rises to 50-100k$/coin between now and then, I certainly won't complain. But I won't ever bet the farm on this stuff.

HRH Feant2's picture

The SEC came out and said they were going to be watching ICOs. I don't see a problem with that. People are making extraordinary claims and based on little more than a white paper and website they have been able to obtain large amounts of money, from the public, in an unregulated arena.

On the other hand, Coinbase has been careful to abide by the law and fairly or not has quickly acted to boot anyone that thought they could use the exchange for nefarious purposes. I think that demonstrates good will and customer protection. Smart.

Unlike VERI and the founder of that coin who has made extradodinary claims. The SEC is going to go after bad actors and I have no doubt they will go after Reggie Middleton. The big tell was that one night when $8 million worth of VERI went missing. Sure they did.

There is a reason Coinbase has not added sketchy coins. If they expect to remain in business that is smart.

FactDog's picture

Agree with everything but #2.  I too went down the rabbit hole in 2013 and luckily paid the piper and made some investments.  I also testified to the Senate (Canadian) that the on and off ramps (exchanges) needed some serious regulation.  We are still waiting, but that regulation is starting to come.  

BTC is the market leader and everyone relates new coins value to BTC.  With the atomic trades, BTC becomes the common denominator.

I see BTC as the reserve currency in crypto. Like GOLD.

 

 

11b40's picture

How many here wish that they were the bagholders of a bunch of BTC they bought a few years ago?

espirit's picture

I still see a problem with BTC and other coinz becoming mainstream on an organic level.

Consider vending (which is becoming connected), or other small denomination transactions which require small sums to be exchanged -

all would have to be collated for end-of-day transfer via protocol, otherwise server requirements are going to be too much for mom and pop ops.

Do you get the drift or do I need to clarify?

We already have digitized currency to fill that need - which works but is not decentralized. Looks like a tough battle ahead for Cryptos.

Also, I don't see that the local black market... er 'flea market' is going to accept anything but the currency de jour.

Golden Phoenix's picture

People host a fully functional bitcoin network node on a $15 Raspberry Pi. How onerous could lesser requirements be? 

The local market, black, grey, or white, is now global and delivers to the doorstep. 

tmosley's picture

>small denomination transactions

IOTA is built for that. Zero fee transactions which strengthen the network rather than draining resources allow not only for microtransactions, but for nanotransactions.

AE911Truth's picture

Just keep in mind that the S in IOTA stands for Security. Lightning will enable bitcoin to handle small transactions.

FactDog's picture

I was. No capital gains yet Mr Taxman because I have not sold any:-)

 

Lost some by keeping them in exchanges though. 

AE911Truth's picture

And there is no need to ever sell your bitcoins. Need fiat? Make a fiat loan to youself with Salt. 

Seasmoke's picture

Banks are nervous and getting desperate. That can't be good.

holgerdanske's picture

To me that is beautiful.

Nothing nicer than an ex bankster.

JiminyCrickets's picture

Banksters are getting irritated and there are 2 hard forks coming up in the next 30 days. Battle stations!

abyssinian's picture

ETH isn't really a cryptocurrency but a smart contract blockchain platform... And this guy is an expert on cryptos? wow! 

FreeShitter's picture

I remember buying ETH at 17...ahh the gold old days.

WhosJohnGalt's picture

I 'member mining tons of ETH at sub-$1 valuations almost exactly 2 years ago.

albanian's picture

You like too brag about staf.

tmosley's picture

Just goes to show how far behind the Wall Street banks are. The central banks are even further behind.

They are doomed.

peddling-fiction's picture

Doomed?

<chuckle>

Planned doom, planned.

tmosley's picture

Like that time the dinosaurs summoned a meteor to wipe out all those pesky small mammals.

putaipan's picture

to paraphrase bungabunga - "discussion of bitcoin on zh is a lot like vigins in a roomtalking about sex"

but then again, this article goes a longway to describe why that is. have faith, we all get laid given a long enough timeline

VD's picture

like buy silver crash jpm zealots crying silver to $60; it sure does rhyme.

Buckaroo Banzai's picture

The difference there was, "buying silver to crash JPM" was trying to beat JPM at its own game.

Cryptocurrency and blockchain tech, on the other hand, is a brand new game, and it's been going for the better part of a decade now. Yet the JPMs of the world still haven't even figured out what the rules are.

11b40's picture

You mean they have not yet figured out how to MAKE the rules, and control the game.

Mr_Potatohead's picture

"The biggest sign that it’s not a bubble, is that almost everyone says it’s a bubble."

Somebody please refresh my memory.  What was everybody saying in 2000, just before the tech meltdown happened?  How about the weeks/months before the most recent meltdown in 2008?  Prediciting when a bubble is going to pop is like predicting exactly when an avalanche is going to start on its own.  Getting the timing right is impossible, but you have to be blind not to see the set-up.

tmosley's picture

I know right? Rmember when the internet and all technology disappeared forever after that? That was terrible!

Mr_Potatohead's picture

The internet and technology survived just fine, but a large number of well-hyped companies/stocks and their promotors aren't around anymore. 

VD's picture

precisely. and while blockchain is useful, the monetization of it will ultimately fail a la tech bubble crash.

tmosley's picture

Yeah, because there is totally no use case for money that isn't controlled by a central bank.

Jesus fucking Christ.

logicalman's picture

If you think the banks will just give up control you are delusional.

 

VD's picture

i know jpm traders trading btc regularly-- they treat it as high volatility play and nothing more. they could give shit if delusional disenfranchised crypt0-tardz have staked their retirements and escape plans w/ it.

Golden Phoenix's picture

Look who's a janitor at JPM. Good for you.

tmosley's picture

They don't have a choice.

It might not appear that that tiny, rapidly growing fireball in the sky is any match for the dinosaurs, but it will give us tiny mammals the world all the same.

logicalman's picture

When everything you do electronically is recorded and tracked those in control will only allow you to do so much before dropping on you like a ton of hot shit.

Do you think the likes of IRS are going to leave BC alone?

 

Maestro Maestro's picture

Stop swearing like that. It's not right.

Insidious piece of shit,

Bitcoin is directly under central bank control (unlike gold and silver which cannot be created out of thin air, and must be mined and refined) because cryptos can be created ad infinitum by the bankers. Cryptos are electrons swimming in a banker's computer regulated and controlled by a computer program known as Blockchain. Furthermore, the bankers can create fiat currencies and manipulate the price of cryptos higher at will by buying them with the fiat they conjured into existence. Hint: the price of Bitcoin is going up $1000 a month whereas (paper) gold and silver stagnate.

Obviously, the bankers want bitcoin to go up and gold to go down.

Golden Phoenix's picture

So what to do? Obviously you ride gold down and deride bitcoin.

Jesus Fucking Christ.

logicalman's picture

Gold is insurance, not currency.

The number of FRNs you can exchange for it is irrelevant, come the day FRNs revert to their intrinsic value.

In ancient Babylon an ounce of gold would buy you a loaf of bread for every day of the year. Sill pretty much the case.

In ancient Rome an ounce would buy you a decent toga, a good pair of sandals and a nice belt. Today, a suit, shoes and a belt.

US dollar has lost 97% of its purchasing power since 1913.

BC hasn't been around very long and only history will tell.

Hedge accordingly.

tmosley's picture

>Stop swearing like that. It's not right.

>Insidious piece of shit,

Was that a joke? I can't tell exactly how retarded you are.

>Bitcoin is directly under central bank control

Hahahahahahahahaha

>unlike gold and silver

HAHAHAHAHAHAHAHAHAHAHAHAHAHA

JiminyCrickets's picture

Anyone who looks at the market depth or order books cant see this is just a small number of accounts washing trades back and forth, driving the price up...