I wrote this article back in early 2018 before everything had crashed. Now that the crypto world is roaring back to life, I believe it’s still relevant so am publishing here:
March 3, 2018
Six months ago I began investing in Blockchain tokens in collaboration with Emily Liu, the former head of marketing and PR for Mt Gox. Along the way I’ve seen boundless ups and bottomless falls and heard much about bubbles, popped bubbles and scams. Yet it has been rare to find a coherent voice across media, investors, or skeptics, demonstrating depth or understanding of the current value and promise of Blockchain-based companies. Most are Bitcoin and US-centric, often criticizing Bitcoin’s deficiencies and relevance, while ignoring hundreds of other companies and uses globally.
In this analysis I hope to demonstrate why Blockchain based companies represent a significant paradigm shift, much like Uber and AirBnB, through analyzing Blockchain’s similarities to these very companies.
Uber’s great innovation is not as an app for hailing taxis. That alone would have been a boring software company selling to existing private taxi services — a limited and quickly saturated market. Nor is Uber’s value as a taxi company, as Uber owns no cars and employs no drivers; a fundamental element of its value (even if the European legislature sees it differently).
Uber’s true value is in exploiting underutilized assets through a platform of (near)decentralized trust and (near) decentralized efficiency.**
This platform empowers an expansive and dynamic market for profitable, low cost rides meeting variable demand. And Blockchain is essentially the same thing, but for everything. Let’s dissect this statement.
**I say near because ultimately Uber is the final arbiter for trust and efficiency through its centrally controlled servers.
Companies like Uber, Touro, Doordash (Deliveroo), AirBnB, etc, allow people that own cars, have spare rooms, and/or have some extra time, to monetize these assets when they would otherwise be idle.
Blockchain likewise allows people with underutilized computing resources that might otherwise be idle (think your spare laptop, desktop computer when you’re not home, idle company servers) to monetize them by providing a distributed service — we’ll call these folks “miners”.**
Think of any service that can be completed with a computer, break it up into little pieces and distribute it across miners to each complete parts of it redundantly. This is similar to what some people think “the cloud” is, but instead of Amazon or Microsoft processing data, it’s distributed across thousands of people’s machines, and instead of Amazon getting paid, these “miners” get paid (we’ll dive more into how it all works soon).
**just as there are people who have become full time drivers for Uber, so do some miners become full time miners, but the idea is that the supply is variable and seeded by underutilized compute assets
Pre-Uber and AirBnB, there were significant trust issue with independent service providers. If I wanted to be an independent taxi driver, or to rent out my room, I’d have a lot of risk in finding a tenant that wouldn’t ruin my home or be crazy, or a rider that would pay me and not trash my car. Likewise as a passenger or guest, there would be little reason to trust my safety and comfort in a random person’s home or an independent cab.
In the Blockchain analogy, if I needed a file stored (Filecoin), some image rendering (Golem), or to transfer money (Bitcoin/Dash/Litecoin), I would never ask someone random on the internet to do so. For starters I don’t know how I’d find them or if they’d do the work or, let alone how long it would take, if it would be done right, or if they’d just steal my money. And as someone with a computer who could meet this need, I wouldn’t be able to find someone willing to give me their money, or design project, and if they did, I wouldn’t trust that they wouldn’t send me a virus or that I’d ever get paid.
By introducing reciprocal rating systems for both users and providers, coupled with instant and verified electronic payment capabilities, Uber, AirBnB and others solved the trust issue.
In simpler terms,
Because Uber has your credit card, the driver can be assured you’ll pay, and because Uber can track the driver’s location and verify the ride, you can generally ensure you’ll get where you need to go. Moreover because you can rate the driver and they can rate you and either of you will get kicked off the system if you get multiple poor ratings, you’re both incentivized to do behave “well”, building trust.
Likewise in Blockchain, by creating a redundant distributed public ledger with proof of work, Blockchain solves the trust issue — everyone can see if someone did their work.
Blockchain technology allows a user to request a transaction or service.
This request is sent to all (or many) “miners” — people with underutilized assets willing to perform said service. They then complete the service for a small payment in the form of a “token”; eg updating a payment transaction ledger for Bitcoin, or processing a file in Golem, or updating a location ledger for a product in a supply chain for Vechain.
Each Blockchain application utilizes some measure for proof of work — proof that the miner has executed the service, and the miner subsequently gets paid. The work requested, executed and the results are all stored on a public record, the Blockchain, and replicated across thousands of computers simultaneously.
Because the results are updated simultaneously and redundantly, and are transparent to all, if any one miner does their work incorrectly it won’t match other miners’ work and their error is quickly caught. Unless you have a majority of “miners” coordinating fraud to update a ledger incorrectly, which is near impossible given the number of miners, fraud is eliminated — trust through transparency and redundancy.
Moreover, in Bitcoin, a significant energy cost is used to further disincentivize miners from even attempting fraud — mining is expensive and you only get paid if there is consensus on the transactions you validate.
Another fraud disincentivization method is “proof of stake” which basically means a miner has to pay a small fee, or “stake”, to mine, and if they turn out to be fraudulent they lose it, but if they mine properly they can earn a more significant reward. Proof of stake punishes attempts at fraud without any wasted energy, a common complaint for Bitcoin.
Pre-Uber there was a market size issue. As an independent driver, it would be difficult to find riders. I couldn’t just give everyone my number, and even if I did they couldn’t rely on my availability as I’d only be one person. I’d be limited to driving around dense areas and competing with other taxis. In the AirBnB case, I could advertise on craigslist or gumtree but I’d likely get a lot of spam if there was even interest at all given spotty usage of those sites in different cities.
Because of market reach (exacerbated by trust issues), my utilization would be low and I’d have to charge a lot per ride or stay for it to be worth my time and effort, which would be even less attractive for riders or lodgers. Whereas the alternative of private taxi companies or hotels which could leverage economies of scale for market reach and efficiency (reservation centers, advertising, maintenance etc), were trusted, easier, and cheaper for the consumer, and were rightfully the preferred option for decades.
Leveraging technology (apps and websites) to match local drivers and spare rooms with interested riders and lodgers Uber and AirBnB created a marketplace where both sides of the market could easily find one another efficiently. Moreover Uber provided navigation directions and AirBnB provided a platform for searchable preferences and communication which served to make the transactions smoother and more efficient.
Most critically, with a variable pricing model on an underutilized asset, people could decide as they pleased to drive or let their room. The higher the demand, the higher the service price, the more people would be incentivized to offer ridesharing or lodging services for a greater return, thereby increasing supply. Alternatively, lower prices could attract riders or lodgers that would otherwise take alternative means of transport or lodging. Variable pricing, variable demand, and variable supply, increase both sides of the market, improving utilization and trust of service. Higher utilization of cars and homes meant lower prices for comparable, if not greater, earnings; a win-win for service providers and customers which disrupted the taxi and hotel industries.
And for Blockchain,
By definition all Blockchain companies are marketplaces with variable supply (miners), variable demand (service customers), and variable pricing (the price of the token). It likewise provides common a point of exchange for miners and customers to “meet”. And while not all services are more efficient decentralized, many applications do benefit from a decentralized architecture.
For example, maintaining title for an asset, such as a home or car. Currently a centralized system for title is managed by the government. We are dependent on government employees who are limited and work normal business hours. Rigorous identification, signature, and notarization processes are often required with both parties meeting in person or mailing physical documents to one another. Files are kept on centralized government computers which could potentially be hacked. Alternatively, if a complete ledger of all properties is redundantly stored, encrypted, on thousands of machines, we eliminate the need, cost, and risk, for government infrastructure to store this sensitive information. If asset holders kept a security key determining rights of title and transfer of the asset on the ledger, they could send a message to all maintainers of the ledger (miners) to update their ledgers simultaneously with the new ownership key of the recipient (new asset holder). We thus eliminate the need for expensive, time-consuming and inefficient processes. That’s precisely what Blockchain does.
The very same concept applies to payment — instead of my bank maintaining my account value, and every time I want to make a transfer to someone else I need to request from my bank to send money to the recipient’s bank (on their business hours and time frame) and they then need to go to their bank which confirms receipt and updates the value of their account, we can eliminate the central processor altogether. Thousands of miners store the complete ledger of all transactions redundantly, and every account has a secure key which each account holder possesses enabling transfer of funds. If an account holder wants to transfer funds, they send a single request with a transaction fee to the Blockchain, requesting all of the miners to update the ledger simultaneously. No bank required. No buildings required. No bankers required. No advertising required. No bank profits required. And it happens 24/7, with money transferred within minutes. And if any one “miner” gets hacked it doesn’t make a difference because changing one ledger is meaningless as the true ledger is stored redundantly on thousands of servers (currently only “exchanges”, where people convert fiat currencies like USD, or GBP into tokens, are hacked, not anyone’s token wallet). That’s the idea behind bitcoin, litecoin and other crypto-currencies.
And so we see that many “middleman” type activities with multiple parties could benefit from removing the need for a central authority.
A few other examples include:
Multiple parties updating supply chain information for a product. In addition to an end-to-end trail of the item, if the product was counterfeited at some point, then as soon as the false item made its way into the supply chain, there would be a duplicate entry for the product’s key in the Blockchain, and we could identify precisely where the duplicate originated.
Instead of having disparate doctors, pharmacies, and insurance companies maintaining partial health record data, and instead of trusting our health data to Google or Apple, we could have all parties update an encrypted Blockchain of health records and each patient could control and choose what to share with whom. Your data would be secure, available to be shared with anyone you permit, and securely encrypted and controlled by you.
What about ICO’s and Tokens?
A brief note on ICO’s and Tokens. Tokens do NOT represent equity. They represent payment for the service being offered by a specific Blockchain company. In the Uber example, the token might be the value of a 1 mile ride, and 5 tokens would take you 5 miles. An ICO is a way of preselling tokens — preselling payment for services, at a discount. Different Blockchain companies will presell these tokens at different stages. Some will presell it before building their product, using the funds to pay for development, some will presell once they’ve proven their product can work, and some will sell it when they’re ready to scale. It is indeed an alternate means of funding a company (like Kickstarter), and those purchasing tokens should believe in the ultimate value of the service being provided. If you had the chance 15 years ago to buy 10000 ride-miles on Uber discounted for $.10 each, would you? If you believed in Uber, you’d believe that the value of a mile might rise by 5–10X and it would be a worthwhile investment.
A Paradigm Shift
And so when I hear talk that tokens are valueless and that it’s all a bubble, it’s because people misunderstand what tokens are meant to be used for. These are real companies, with real customers, and real revenues. The tokens represent the services of the miners. Of course not all Blockchain companies are legitimate, indeed like any startup ecosystem, most will fail, some will be fraudulent, and some will succeed. But most Blockchain companies are fully transparent about their plan, product and technology. They create a market of consumers and service providers by preselling their services — seeding their marketplace, building followers and awareness and starting a network effect; generally the greatest challenge of any marketplace.
I thus believe Blockchain companies represent a fundamentally new platform for commerce and service provision in a decentralized environment, cutting out middlemen and inefficiency, and creating a marketplace for just about anything.