Inigo Montoya: You are wonderful!
Man in Black: Thank you. I’ve worked hard to become so.
Inigo Montoya: I admit it. You are better than I am.
Man in Black: Then why are you smiling?
Inigo Montoya: Because I know something you don’t know.
Man in Black: And what is that?
Inigo Montoya: I am not left-handed! [switches to fighting with his right hand]
– The Princess Bride (1987)
Let’s admit it. This year was a bit chaotic for blockchain efforts.
Cryptocurrencies crashed. The SEC rained on the ICO parade. Many
corporate projects, announced with elaborate fanfare, seemed to progress
at a snail’s pace.
On top of it all, someone claiming to be Satoshi threatened to take the
price of bitcoin down to $1,000, while a related faction threatened what
amounted to a DDoS attack on a rival fork by planning to mine worthless
blocks. (With blockchain friends like these last two, who needs a
six-fingered man for an enemy?) And on a more somber note, we lost Tim
May, who provided early inspiration for me and many others with
crypto-libertarian aspirations.
So why am I smiling? It would be presumptuous to say that I know
something that informed readers do not. But perhaps I have a longer-term
perspective. For while as a community we celebrated the 10th
anniversary of Satoshi’s white paper, next year is another anniversary
for me. Namely, 2019 will mark 30 years since Stuart Haber and I began
working on a contributing thread to what has become the blockchain.*
From that perspective, the disturbances of this past year are transitory
issues that distract from value creation fundamentals. From financial
services to social media, from crypto-based banking services to making
real assets liquid, opportunities abound. And as Chief Scientist at a
blockchain venture capital firm, I am prepared to recommend how to
invest tens of millions of dollars in blockchain efforts this coming
year.
The movie Jerry Maguire made famous the line “show me the money.” Let me suggest four “show me”s.
Follow these in 2019 and perhaps I can show you the investment money.
1. Show me the community
Successful blockchain efforts don’t begin with technology. Instead they begin with a community.
Indeed, Tim May and others of the cypherpunk community who helped create
that community’s sense of shared purpose had as much to do with
bitcoin’s early rise as did the technical merits of Satoshi’s work. This
point, often lost on those who didn’t live through the pre-bitcoin
days, leads many to draw the wrong conclusions about the reason for
bitcoin’s early rise. Its community was primed to embrace a peer-to-peer
currency and was thus willing to accept bitcoin weaknesses along with
its strengths.
New blockchain efforts should begin with a community that shares a
common interest and purpose. This is the fundamental promise of the
blockchain: a shared, immutable record that allows communities to
achieve their collective hopes in a peer-to-peer, transparent and
efficient way.
2. Show me the solution to today’s problems
Successful blockchain efforts will not offer solutions in search of
needs, but rather should solve current, pressing problems. And these
“products” should provide immediate benefits to their earliest users,
even without the benefit of scale.
Far too many blockchain enthusiasts in 2018 simply railed against the
incumbents, the evils of the current systems, and the greed of their
actors. They convinced themselves that because their blockchain-based
solutions were different from the wrong answers, their solutions must of
necessity be the right answer.
Such sloppy logic will no longer work. Blockchain aspirants should ask
themselves a difficult question. Namely, is their solution truly a
current “must have,” providing benefit to even the earliest users and
then growing in value with network effects? Or is it just a “nice to
have” convenience, the value of which will become evident only when the
community reaches scale? Or even worse, is it merely a clever technology
that solves a problem developers simply wish the entire world will
someday have?
History demonstrates that successful revolutionaries focus less on what
they fight against and more on what solutions they propose. The best
visionaries have incremental, largely self-sustaining plans that grow
over time to achieve radically improved results.
In 2019, efforts that fit this near-term/long-term dynamic will be well
positioned. The financial services industry presents many such
opportunities, as it is straightforward to quantify benefits that can be
realized from reductions in reconciliation, settlement costs and times,
even in the early stages. And as these networks scale, features can be
added that provide additional utility.
3. Show me the incentives
Successful blockchain applications avoid creating destabilizing
incentives, while allocating value to the participants within the
ecosystem who actually create value. Creating that value via
non-centrally governed communities can be especially challenging. Unlike
classical corporations that rely on conventional, hierarchical command
and control, successful blockchain systems require internal incentives
that cultivate communal growth and stable peer-to-peer governance.
Successful incentives and related governance mechanisms avoid the kind
of behavior demonstrated this past year at the hard fork of BCH-SV and
BCH-ABC. Questioning pure proof of work might seem tantamount to
breaking faith with the core tenets of decentralization. Yet I am
convinced that proof of work can be improved upon in order to avoid
these sorts of behaviors without relinquishing its useful incentives.
Fundamentally, decentralized communities require incentives for its
community members to hold and validate the tamper-evident records,
making them collectively immutable. With that as a secure foundation,
they can then consider whether a token, representing an actual stake in
the community’s common assets and purpose, fits the circumstances. If it
does make sense, then one must ensure that the differential equation
for reward redistributes tokens along the gradients of value creation
and long-term stability.
In this regard, community-based social media platforms continue to offer
a large but still largely unrealized opportunity. Tens of millions or
even billions of suitably incentivized users would be a force with which
to be reckoned.
But claimants to the Facebook/LinkedIn/Reddit/etc. throne must also
demonstrate how well they understand the community and provide a
compelling solution.
4. Show me flexibility, not rigid orthodoxy
Successful blockchain applications are no different from any other class
of startup venture in that they need to adapt to the needs of their
user communities. It is the records, not one’s approach to
problem-solving, that must remain immutable.
Because Satoshi was legitimately concerned that governments might want
to shut down competitors to their fiat currencies, he invoked massive
computational redundancy as part of decentralization.
Today, however, most blockchain applications operate in a different
environment. It’s hard to imagine the military hunting down providers of
shared medical records, for example. Thus, as blockchain applications
extend beyond bitcoin, it is worth reexamining when, where, and how
users’ needs require different classes of solutions. In these early days
of blockchain, in which a dominant design has yet to emerge, innovators
must be flexible enough to explore new possibilities informed by their
users and thinking from first principles.
More generally, an inappropriate focus on fighting the last war is
symptomatic of leaders unwilling to change even as conditions evolve.
Initial plans almost never work. Successful leaders listen to what users
are saying and pivot accordingly.
The promise of decentralized trust has come a long way from its early
beginnings in the late 1980s. Yet to give due respect to the significant
work done by Tim, David, Nick, Satoshi, J.R., David, Blythe, Caitlin,
Vitalik, Joe, Dan, Ned, and many, many others, blockchain communities
must not fail to learn from the lessons of this past year.
To realize the promise of a fairer, more transparent, peer-to-peer
world, we must put community first, focus on solving present-day
problems, continue to refine incentives and governance, and respond with
flexibility as needs and circumstances change.
Those who do so should find themselves smiling with me in 2019, as we
know something others do not know: we know the fundamental promise of
the blockchain.
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