Brace yourselves, I’m going to state my unpopular opinion upfront so you know what you are getting into before you read too far into this. Today’s blockchains are virtually useless. Obviously that sentence has a fair amount of scare tactic in it, but ultimately it is true. Think of the current applications of blockchain and how they are utterly dominated by the leading competitors in each industry. Ethereum executes code; amazon web services executes code at a fraction of the cost and multiple of the speed. Siacoin stores data; AWS dominates it in business scale applications and a simple external hard drive can satisfy the needs of most consumers in ease of use. Disruptive technology does not gain adoption because it is better in principle. There are a lot of arguments as to why cryptocurrency has better underlying principles than regular money. It is not controlled by any one entity, for example. There is only one reason disruptive technologies take off, and that is because they reduce the cost of satisfying a demand.
This principle can be applied to any disruptive technology in history. The internet reduced the cost of transferring information. The telephone reduced the cost of talking to other humans. The wheel reduced the energy expended to move objects. Even technologies that create new demands are really just satisfying old demands in new ways. Netflix created a new demand for internet streaming, but really just reduced the cost of watching your favorite shows; no longer is any planning required, nor is there any opportunity cost of missing your favorite sports team play. This is how disruptive technologies take off, and the speed at which they take off is proportional to how many people are currently satisfying that demand, how many people can cut their costs by using the technology, and how much upfront cost is required to switch their current habits. In order to truly understand the coming blockchain revolution we have to look at the blockchain as a disruptive technology, and analyze how it allows its users to cut their costs.
Step 1: Disintermediation
The first step in the blockchain revolution is the reduction of costs associated with intermediary fees for moving money. There are a vast number of intermediary fees associated with this industry, and we have already seen a large number of fintech companies become unicorns based on reducing these associated fees. Robinhood is the quintessential example of this as they have become absurdly large with one simple premise, no trading fees. Stripe is another good example of this, though the fees that they reduce are more abstract. Stripe created a product designed specifically for web developers, simple to use, well documented, and predictable APIs for accepting payments. They reduced the cost of accepting payments over the internet by reducing implementation time, a very significant cost in the tech world. These examples show that products can become successful on ridiculously simple premises. What blockchain does (or will do) is an entirely new level of financial disintermediation. It literally takes the middleman out of money. Before bitcoin you had to either hold literal cash or count on another party to move your money around for you. This will reduce costs at levels never before seen if governments allow it to be implemented. I’m not sure why I have to pay $30 for a same-day ACH transaction to transfer money from my bank account to my landlord’s, but I know that I can do the same thing with bitcoin cheaper and faster even in its premature stage. Sure alternate payment methods like credit cards can even incentivize you to make payments, but this is because they are charging the vendors not the consumer. Vendors have so much to gain from accepting bitcoin as a payment method and not having to deal with interchange fees. This is why Amazon is looking into holding bank deposits, it has been estimated that they could save $250M on interchange payments.
Step 2: Massive Supply Infusions
The so-called sharing economy today shows how effective the internet has been at improving the efficiency of assets. Startups like Uber and Airbnb have tapped into the assets purchased by consumers and allowed them to commercialize them by creating internet platforms. Consumers have purchased houses and cars but they rarely if ever use them to their full capacity. We have spare bedrooms, we take the metro, we go on vacation. These are examples of value left on the table, and where this exists there is excess supply. In the same way that Exxon has been forced to develop new ways to extract oil from the ground, these tech companies have found new ways to extract valuable assets from you and I at costs cheaper than traditional providers. This excess supply lives in far more than just hotels and taxis, and blockchain is well-poised to extract it. There is one asset in particular that blockchain is specifically designed to extract, and that is computation.
While the internet has significantly increased decentralization of power, the power of the dollar still serves its place in the internet today. AWS and Microsoft Azure can dominate the cloud storage and server markets because of the sheer scale efficiencies they enjoy by buying a ton of computing power. There exists, however, a vast amount of unused storage and computational power stored on consumer assets as well. This is why Golem and Filecoin are targeting this market, and attempting to become the equivalents of Airbnb for computer networks. Once there is the ability to run applications on this ‘world computer’ the concept of servers will become archaic. Blockchains are designed from the ground up to be ‘serverless computing’, the buzzword that Amazon has been gaining so much attention for recently. This infusion of supply to the markets will cause huge efficiencies in storage and computing power, thus saving people money. The main obstacle here is for blockchain startups to create simple interfaces, which is a significant obstacle indeed. Blockchain pioneers across the industry have noted this need including Juan Benet of Protocol Labs in his talk for Ethereum Devcon. Ultimately, however, the open-source nature of these protocols means that someone will eventually build user-friendly and simple ways to interact with these protocols, and if they build it others will come.
Step 3: Smart Contracts
Smart contracts has been touted as one of the core value tenets of blockchain technology, but the use cases for them today are slim to none. Smart contracts intrinsically rely on the prior existence of a system designed to support them. For example, if we have a venture fund that creates shares of its portfolio company and locks up shares until the public sale, what good is that system if you have to first transfer those shares to the NASDAQ before they can be liquidated? The whole point of smart contracts is a seamless integration of dollars and code, but if we are left with manual processes separating these worlds then we aren’t truly reducing much cost. This is why the first two steps must happen before smart contracts are able to achieve their true potential. We need mass adoption of these protocols so that when smart contracts are ready, the value they transfer will be liquid and available. I have to admit the use cases for this type of value transference are mind-bogglingly complex, and even I have not taken the time to think through the potential applications of this technology. Imagine a system capable of the complexity of our internet but instead of transferring data we are transferring value. No speck of value will go unpaid for, no iota (pun intended) of data uncompensated. You could be a web developer in America paying someone in India for access to their morning routine so you would know when is the best time to send them a marketing email. It may sound dystopian, but it may also pay for that man’s breakfast. The world we have today allows large players to siphon off value from the common man, who has no other means to monetize it. Smart contracts will change all of that by making the process as easy as joining Facebook.
If you’re reading this thinking I’m crazy you’re not wrong, this is all speculation and decades away even in theory. But it describes a future that is on its way, whether perfectly accurate or not. When we have these abilities the only thing that will hold us back is those who will be negatively affected by the changes, and if the past is any example of the future they won’t hold it back for long.