The State of Cryptocurrency: Mid-2017 Edition

I went to the 2017 Blockstack Summit to try and get a feel for the current state of the cryptocurrency technology and market.

Many of the people I follow in the cryptocurrency space were either attending or speaking, including Naval Ravikant, Nick Szabo and Balaji Srinivasan.

It gave a good overall picture of current state of the technology, so I thought I’d publish my notes on a few of the panels here.

I also give my high level thoughts after the notes for where I think the technology is heading over the next few years.

Presentation Notes

Elizabeth Stark

Talk theme: The layers of the blockchain currently being built are comparable to the current TCP/IP layer and HTTP/application layer of the internet.

One of these layer 2 applications is Blockstack, itself, another is The Lightning network.

The Lightning Network is a protocol that will let transactions happen off the blockchain so they can happen much faster. The blockchain then acts as an arbiter that will remove counterparty risk.

This will maintain the security and immutability of the blockchain, but also allow for use cases which require more transactions per second.

High volumes of transactions via the Lightning Network will make decentralized autonomous organizations (DAOs) more feasible, because they can do lots of tiny transactions off chain at zero transaction cost, and then settle on the blockchain for a small fee.

My note: An example of a DAO is a self-driving car that would be able to pay tiny amounts to other cars it wanted to pass if it was in a hurry. Another example might be a refrigerator which could automatically order items to restock itself.

A major tipping point and perhaps the killer app will be whichever one can first make itself worth using, not because of security or privacy concerns, but just because it’s a good user experience.

Nick Szabo

Talk theme: Law is a very old technology that has been debugged for millennia and is effective. The goal of smart contracts should not be to reinvent law, but to bring it into digital commerce.

Further, blockchain itself can actually be viewed as a type of security protocol at a very low level of the society protocol stack.

Society’s Protocol Stack

There is a computational surplus from Moore’s law where human mental cognitive power is fixed. The idea behind smart contracts is that excess computational resources can replace current human cognitive resources - like lawyers.

The internet created permissionlessness. You could put up a website without asking IBM’s permission. The blockchain will add security on top of that. You don’t have to ask permission, and you can’t be hacked.

Wet vs. Dry Code.

Traditional law is “wet code,” — manual, local and uncertain. Blockchains are “dry code” — global, automated and relentless.

Wet Code (AKA Lawyers) have very low predictive power because law is subject to whim.

An example of this is the recent SEC announcement pretty much saying “ICOs are illegal! But we’re not going to prosecute them…”

This isn’t universal: highly evolved law can be predictive, but in international law or with new tech, predictability of wet code/law is often quite low.

Dry code can have harsh results in presence of unanticipated conditions.

Blockchain programming is different from Web programming because if you mess it up then it can create an unstoppable chain of events.

Move fast and break things is not how lawyers operate for a reason.

If you want to write smart contracts, you should study the history of contract law. Szabo’s Book Recommendation — Medieval Trade in the Mediterranean World.

• Most modern contracts are overly complicated.
• Smart contracts can cross trust boundaries like organizational and national boundaries that wet code has trouble crossing.

In essence, we should look for existing wet code and figure out how to turn it into dry code.

Balaji S. Srinivasan

Talk theme: Many believe decentralization is the most important property of cryptocurrencies like Bitcoin and Ethereum. If this is true, then it is critical to be able to quantify decentralization.

Gini Coefficient

You can map decentralization to Gini coefficients, a measure of inequality.

Low Gini is very equal and decentralized.High Gini is very unequal and centralized.

As the cumulative distribution diverges from a straight line, the Gini coefficient increases from 0 to 1. Figure from Matthew John.

Here is what the current Gini coefficients for different subsystems of Bitcoin and Ethereum look like:

Nakamoto Coefficient

The Nakamoto coefficient is the number of units in a subsystem you need to control 51% of that subsystem.

• It’s not clear that 51% is the number to worry about for each system, so you can pick a number and calculate it based on what you believe the critical threshold is.
• It’s also not clear which subsystems matter. Regardless, having a measure is an essential first step and here are the Nakamoto coefficients of each subsytem:

The future will be multi-chain.

Decentralization applies at the coin level and you will see coins geared towards different use cases.

“...If I was in my 20's, I would never start a US company. I would only start it on the blockchain. Funding is no longer tied to a location so technology is going to decentralize out of the US and tokenization will be a major buzzword”— Balaji S.

If you’re developing Blockchain apps, think about progressive decentralization.

It’s very hard and there are many security risks to launching decentralized. It will be better to start centralized and have a roadmap to analyze piece by piece what should be decentralized and only go as far as makes sense.

Balaji posted a full write up of his talk here.

Naval Ravikant chat with Ryan Shea

• Traditional venture capital is fundamentally based on access. VCs get access before Joe Public. With ICOs, Joe Public gets access on day one so scarcity (and thus value) goes from deal flow to judgement.
• The internet in the late 90's looked like it was going to flatten all the middlemen, but instead it turned into walled gardens: Facebook, Amazon and Google.
• Internet protocols like HTTP and TCP/IP were tragedies of the Commons that got abused by companies on the application layer like Google and Facebook. The Blockchain is the opposite: it has fat protocols and thin applications.

The blockchain will realize the potential for a more meritocratic and democratic system.

• There will be a lot of resistance from existing power structures because they are going to be shoved into the meritocracy and that sucks if you are privileged.
• We will never see another elite president like Clinton or Bush. It’s all Trumps and Sanders from here on out.
• Blockchains and decentralization are important because it allows for permissionless innovation. Historically you had to wait for people to die to innovate because they blocked you.
• Perhaps violence will be replaced with forking. Instead of having to resolve conflicts, you just fork.
• One of the best things about crypto is its not geographically centralized in San Francisco, that is a strong sign of decentralization.
• Nation States will be forced to choose between regulating and getting more innovation.

Note: The rest of the talks from the conference are available here.

My High-Level Thoughts on The State of Cryptocurrency:

1. It’s not that hard to get up to speed

I was surprised by how well I was able to follow what was going on. I really only started reading up in depth on cryptocurrency and the related technology like blockchain three months ago, and felt like I could at least follow all the talks.

If you want to get up to speed, you’re only a couple Saturdays of reading away.

I put together a reading list here: Top 10 Cryptocurrency Resources for Non-Technical People.

2. Overall, the cryptocurrency ecosystem feels younger than I thought.

I expected more “we have this decentralized application (dapp) built and are about to release it” but heard a lot more of “we’re thinking about building this dapp.”

Before conference I was thinking we were mid-90s in internet years. After, the conference, my impression was we were still early 90s.

I am evaluating the “Netscape Moment” as when my Mom can use the tech. I remember her getting on Netscape in ’95, but imaging here using a dapp or investing in cryptocurrency still feels 2–5 years away to me.

Elad Gil disagrees and thinks 2017 is cryptocurrency’s Netscape Moment, the moment when broad involvement from institutional capital and eventually average consumers began.

3. Blockchain is the technology that will let lifestyle businesses cross the chasm from fringe to mainstream.

Protocols are default open whereas companies are default closed.

Companies have to choose to add an API but protocols are inherently open.

This will lead to a ton of lifestyle businesses that can be built on the blockchain.

Imagine if there was no platform risk of Facebook shutting down your app — everyone would build on Facebook because of distribution advantage.

4. Micropayments still aren’t going to work.

I’m bearish on micropayments for content producers. The psychological friction is the problem, not the micropayment. The hardest pricing increase for any business is going from free to $0.01. As soon as someone has to think “do I want to pay for this?” you create a huge amount of friction.

However, I’m bullish on small dollar subscriptions for content producers and fees matter a lot for a $5/month subscription. So, the lower fees possible using a mature cryptocurrency can still make a big impact for content creators.

5. Money leads to Power which leads to Centralization

In 2011, Tim Wu, published The Master Switch, a prescient book which foresaw the re-centralization of the Internet. Wu looked at previous information technologies from radio to television and saw that the early years were all characterized by early adopters praising the decentralizing and democratizing force of the technology.

In all cases, a corporate power intervened and centralized control of the new medium. Radio stations worked with the FCC to keep hobbyists off the air, corporate conglomerates bought up small movie studios.

The same has happened with the Internet:

What started as a decentralized medium, now has a few choke points:

1. A small number of companies, namely Time Warner, Comcast, and AT&T, control the service provider layer
2. The World Wide Web itself is dominated by a few walled gardens: Facebook, Google, Amazon, Netflix, Twitter and a few others.

It’s likely that cryptocurrency will go the same way.

I believe the way cryptocurrency will start to re-centralize is that companies currently building infrastructure will choose how to structure your data, which affects everything built on top.

Consumers will accept this because the cost of structuring your own data is high. It’s really hard.

Early PC users were all about “getting off the mainframe” and letting users control their own machines, but no one wanted to custom program their own computer and so Microsoft came in and dominated the Operating System layer.

There is a sliding scale from personalization/usablity to privacy/security. Cryptocurrency broadly will have to make that tradeoff to gain widespread adoption.

That being said, the Internet is still more decentralized and democratic than what came before and I think cryptocurrency will likewise be a major step toward decentralization and democratization.

Recommended reading:

• Top 10 Cryptocurrency Resources for Non-Technical People.
• Ultimate Guide to the OODA Loop
• The Overton Window and How Creative Business Ideas Arise

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