Why Crypto Is Eating the Internet — Part 1 of 2

This article is part of a series being written to help venture capitalists (VCs) understand the importance of crypto-assets.

In this two-part article you will learn:

• Article 1: Why the world needs blockchain technology; and
• Article 2: Why blockchain technology needs crypto

The cryptocurrency industry rightly has its fair share of sceptics.

Whilst many innovations experience “growing pains”, few can lay claim to enabling international drug trafficking, the loss and theft of people’s assets and the precipitation of one of the largest bubbles in human history.

Unsurprisingly, “crypto” has become a dirty word.

A large percentage of the population dismisses the industry and brand it as illegitimate, and those curious few that investigate it often reach a conclusion along the lines of “blockchain NOT crypto.”

In part, I can understand why. In our experience, there is very little content in the crypto world that speaks directly to business-minded, non-technical, people.

In this two-part article, we aim to explain to you the importance of crypto-assets, beyond bitcoin.

The Problem

As individuals and as businesses, we typically own two types of valuable assets.

1. Our financial assets e.g. money, stocks/shares, real estate, etc.
2. Our data e.g. our identity, our health data, etc.

In the world we live in today, it is next to impossible to engage or transact with others digitally without a third-party. For the most part, we must place our trust in custodians responsible for holding onto our assets or ownership records for us.

For financial assets, the custodian typically comes in the form of a bank.

For our personal data, the custodian comes in the form of internet businesses.

We typically place our trust in the custodians that have either stood the test of time or are used by everyone else.

This self-reinforcing cycle has led to the creation of an oligopoly in the banking industry and several monopolies in the internet industry.

But is this anything to be worried about?

Unlike the cronies of yesteryear, that first inspired our antitrust legislation, today’s corporations are generally considered to offer better value and services to customers the bigger they grow. Take Amazon, for example. The more of our personal data that’s fed to its machine learning algorithms, the more personalised, relevant and rewarding our Prime accounts become.

To understand the threat that today’s corporations pose, we must examine how their products and services are created and the cost of our reliance upon them. With this lens, one quickly starts to realise how many of our freedoms are being sacrificed along the way.

To expand:

Financial Oligopolies

• Insolvency risk — Common deposit insurance covers deposits up to only $80,000 in the UK and $250,000 in the US. The belief that bank deposits are safe has never truly been restored ever since the 2007/08 financial crisis.
• Inefficiency — The average bank transfer still takes several days to settle because it’s limited by the way our financial infrastructure was built. For cross-border payments, it’s slower and more expensive as the process involves several middlemen.
• Financial exclusion — Two billion individuals and 200 million businesses in emerging economies today, lack access to savings and credit. Traditional financial business models are unable to provide the incentives which will encourage the development of the type of products and services that can meet the needs of the financially excluded.

Internet Monopolies

• Power to censor and write the rules — Following the Cambridge Analytica scandal, Facebook currently employs >20,000 staff to moderate the content on its networks. But which content should be censored? By owning all of their users’ data, companies like Facebook own the entire network. In turn, users have no choice but to trust them to make the rules.

Financial Oligopolies and Internet Monopolies

• Security & privacy risk — Over $400 billion is lost each year in security breaches. Most companies warehouse their data in centralised locations. Centralisation introduces single points of failure, prone to hackers or rogue employees.
• Excessive value extraction — Financial institutions and internet businesses alike make the bulk of their revenues from leveraging the assets in their custody. Since these businesses have little-to-no threats from competition, they push the boundaries in a bid to maximise the company’s share price.

Data Hoarding

Unlike consumers, enterprises value the competitive advantage that data gives them and worry about the security and privacy risk associated with opening up access to third-parties (from consumers and the private sector right through to government).

This has meant that business-to-business interactions, for the most part, remain complex, inefficient and prone to error. Data remains siloed, existing in several places at once. The end result is that inter-company collaboration becomes more difficult, since all parties maintain, preserve and hoard their own version of “the truth.”

A simplified view of how the majority of business-to-business interactions and cross-company processes are managed today

When an enterprise does not reveal its records of “the truth,” the third parties it’s interacting with find it hard to trust them. Therefore, enterprise businesses settle for placing their confidence in middlemen such as corporate lawyers and Notaries. These entities exist to ensure that all parties follow the rules and do not break the law. The steps that are taken typically involve paper-based agreements, which all in all serve to slow down the process.

Why we NEED blockchain

Blockchain has given birth to a new type of cloud computing platform. Like any other cloud computing platform, the blockchain-computer is made up of many computers connected to each other to form a network.

And, like any other computer, developers can develop and run applications on it.

So, how is it different?

Blockchain-computers do not depend on central-points of coordination.

Instead, coordination is achieved by “majority consensus” from all the individual computers that make up the blockchain-computer network.

Additionally, the blockchain-computer and its applications are all entirely open-source. This means that the software code is open for anyone to see. Any developer in the world can audit, improve or copy the code, should they wish to.

So, what does this mean?

It solves three things we’ve never been able to truly solve before:

1. It eliminates security and privacy threats — since coordination and “consensus” is baked into the design, there is no longer a single point of failure a hacker can target. For the blockchain-computer to be at risk of a breach in security, the bad actor will need to override the majority of the network. Therefore, the more computers connected to the network, the more secure it is.
2. It eliminates digital dictatorship risks — Since there is no central coordinator with “administrative” rights, decision-making power is distributed to the participants in the network evenly. Power is important because for those that have it have the authority to change the rules of the game. Democracy in the digital age is finally here.
3. It promotes high-quality software code through open source — open source solutions have thriving communities around them, bound by a common drive to support and improve a solution that both the users and the community benefit from (and believe in). The global communities united around improving these solutions introduce new concepts and capabilities faster, better, and more effectively than internal teams working on proprietary solutions. Many hands can deliver powerful outcomes.

So, what does this enable?

It enables everyone in the world to:

• Trust the integrity of the data thanks to the global transparency of the database.
• Trust the security of the system thanks to no central points of failure and mathematically-guaranteed consensus.
• Trust the code thanks to open source.
• Trust the rule-makers thanks to democratic decision making.

So in short, blockchain enables everyone to share a computer they can trust from a security and competitive standpoint.

Blockchain instils trust by sharing roles and responsibilities across the network

Now that we have trust in the system, we can — for the first time ever — manage our own valuable assets without custodians.

To expand:

1. Our financial assets: Our financial assets can be represented digitally, with checks and balances tracked in the shared database. Not only does this eliminate the need for custodians of our financial assets, but it also eliminates the need for the legacy payment/trading processing systems and operations. The shared computer offers a far more efficient payment and settlement rail.
2. Our personal data: the shared database can be used as a globally accessible notary system. By notarising our data and storing the notarised certificate or unique identifier in the shared database, we can keep self-custody of our data and not give it up to the internet companies. Storing notarised certificates or unique identifiers in the shared database does not necessarily expose the contents of our data, but rather proves to everyone its authenticity and existence.

Shared Applications

Now that we have digital versions of our valuable assets that are globally recognisable and accepted, we can now build applications that can interact with them.

These applications will share similarities to applications we are used to seeing from financial oligopolies and internet monopolies in terms of feature-sets and functionality.

However, they possess several technological and economic benefits that make them much stronger:

• They streamline and automate asset transfers — Developers can now build applications where valuable assets, like money, are now “programmable.” The applications could, in theory, be managed entirely by the code running on the blockchain-computer — relying on no paper-based processes that plague the legacy system.
• They streamline law and contracts — Application logic will form the basis of binding agreements between two transacting parties. Enforcement of the agreement will be guaranteed by the execution of the application’s code. The risk of contract breaches we’re used to seeing with paper-based agreements will decrease considerably. Lawyers won’t necessarily be out of a job. Their role will just become more technical. They’ll be tasked with auditing and editing smart contract code.
• They are highly composable — Building applications on the blockchain-computer allows developers to combine various components of the stack that may have already been developed, without asking for permission. As opposed to building on traditional computing platforms, blockchain-computers give developers assurances that their infrastructure dependencies will not suddenly be taken away.
• They are perfectly competitive — Since these applications are “shared” they are more likely to succeed if they adopt decision-making principles that take into account the views of all stakeholders involved (not just shareholders). Should an application try to act in the best interest of its shareholders in a bid to extract excessive amounts of value by raising prices, the users have the power to easily transition to a competitor. Unlike the applications we’re used to, blockchain-based applications do not attain economic moats from the warehousing data or financial assets. Open source makes it incredibly easy for competitors to copy an application’s code and change the rules of the game that better serve the interest of the users. Porting a network from one application to another, in theory, is far less complicated to what we are used to.

High-level comparison between the legacy internet and banking tech stack versus the new, blockchain-enabled tech stack.

Not only will these shared applications eventually displace the commercial banking oligopolies and internet monopolies, but they will also allow developers to build new types of applications that were not possible before. Specifically in the realm of B2B collaboration and privacy-preserving data sharing.

Concluding Remarks

The corporations of today are often viewed with rose-tinted glasses for the valuable services they offer and the importance they play in our lives. However, as we have grown more dependent on them, we have put our security and privacy at risk.

Blockchain technology is a paradigm shift that promises to salvage our privacy and security and enable collaboration between companies that are unwilling to share their data today. It also takes negotiation power away from large internet and banking service providers of today making markets fairer and more competitive. We believe insurgent blockchain-computers and shared applications will disrupt incumbent business models and create a new wave of innovation.

If you liked the first part of this article, stay tuned for part two where we cover why blockchain “alone” does not work and why crypto is a critical piece to the puzzle.