The central purpose of the first part of this series was to summarize the basics of Blockchain/Cryptocurrency hype as it relates to Decentralization (why decentralization is important) and its significance to the Internet’s evolution. The three key takeaways of the first post—
- The Internet was built with decentralized protocols that ironically brought about centralized system—which enable distribution, but can be attributed to the problems of democracy and security present now and the zero-sum with respect to growth.
- Blockchain is an evolutionary phase of the internet that has the potential to address the problems facing the internet world since its key quality—which features validation, structure, and network—possess uniquely decentralized qualities.
- Cryptonetworks share similar attributes to the first stage of the Internet, with the TCP/IP, World Wide Web and HTML, but add a strong technical infrastructure which features a powerful network alignment.
Given Cryptocurrency’s mystical and intangible aura, the second part of the series will go over the future of Blockchain technology within more practical, albeit still potential, use cases (the most promising ones since the photo above shows there are A LOT); but before talking about uses cases, this means picking up with where last post ended by addressing Blockhain’s main challenges. Best summarized by, how close, if ever, are we? The final part of the blog will be my view, summarizing and analyzing the most significant challenges, the most promising use cases, and how to be part of it—if it is even worth it anyways.
Adoption is Everything: It’s First and Last
The length and emphasis to which I discuss the challenges of Blockchain, rather than go through all of its exciting use cases now, might disappoint; I might have misled you. But if you were anticipating Part II to go over all the incredible use cases after reading my at length support of a decentralized system—thinking how one might invest, partake etc.—then your reaction perhaps reveals a fundamental truth in Blockchain technology at the moment.
The gap between technology and investments because of hype.
But in all honesty, how can hype and imagination/creativity not runs its course when discussing Blockchain?
Information exchanges, whether its contracts, transactions, and records, defines and shapes the world’s economic, legal and political systems—so practically everything. Blockchain, and its decentralized quality, promises a solution.
When looking at the market capitalization of the Cryptocurrency market as a whole—we see a general trend upwards but a chart so volatile, that month of tracking encompasses four years of volatility on the stock market.
- In 2017, the total crypto market cap went from $18 billion dollars to more than half a trillion dollars.
- Coinbase became the most downloaded app on the U.S. Apple Store.
- Portfolio and online wallet went global, with imToken in China and CoinManager in Korea.
- Bitcoin futures were launched last month form two of the world’s largest financial exchanges: CBOE and CME.
- Cryptocurrency does not deserve this hype because
- Blockchain technology does not deserve the hype—more later.
- Cryptocurrency relies on Blockchain—should be evident by now.
The most effective truth is the problematic implications of an overwhelming interest in Cryptocurrency, and Cryptocurrency only, and its investment potential, rather its technological one.
It seems almost paradoxical to view the implications of focusing on Cryptocurrency’s investment potential because it should be inextricably linked to its technological potential. From the studying of Elliot Curves with Cryptocurrency assets, the hype of HODL, FOMO, to one liners like the “groundbreaking nature of decentralization” (which even the last post was guilty of)—it is all a shit show.
And I haven’t even gotten to the technological challenges of Blockchain yet!
So, let’s make things a little simpler. It may seem like this article, and series for that matter, has gotten no where. Perhaps that’s the point that will be crystallized later in this piece.
This, for those unfamiliar, is known as the technological innovation curve. Everett Rodgers in The Diffusion of Innovation Theory articulated how an idea, product, or behavior starts slowly with “innovators” to “early adopters,” then x_idea, product, behavior gains tractions and grows exponentially, articulated more clearly today as network effects and virality, to the “early majority,”which from the curve above results in the “late majority”—a more risk averse and skeptical population, to “laggards”—the people who adopt grudgingly.
From the general trend upwards in market capitalization of Cryptocurrency assets, one can make the case of an “early majority.” An incredible amount of capital from institution to household is being poured into Cryptocurrency markets at an exponential rate. By definition the early majority is 34% of the population and adopts the product after the “early adopters” and “innovators,” again the hype is indicative that Crypto is hitting that early majority part. However, this is accurate from an investment side, not a technological one.
The perhaps lack of evident application of Cryptocurrency to the household investor, and arguably some institutional ones, lack of clear value(indicative of incredible fluctuations in price and the incompatibilityof conventional metrics applied to Cryptocurrency), but again paradoxically large scale and widespread disruption of Cryptocurrency…screams Bubble! Bubble! Bubble!
By definition, a bubble occurs when trades in an asset are at a price/prince range that strongly exceeds the asset’s intrinsic value.
By the new millennium, it was clear that the Internet was going to change the world. It began to disrupt every industry and usher in a new economy, a new manner of conducting business, of peer-to-peer connectivity…sound familiar? The application lived up to all speculation and then some. It was likely the single most impactful, most revolutionary technological development since the Industrial Revolution; some would say even greater. Yet despite its groundbreaking success, an enormous crash still occurred.
Let’s rewind the clocks 22 years. It’s 1999 and you are a savvy investor, passionate about the internet revolution. The 6 biggest tech companies are valued at $1.65 trillion, 20% of the US’s GDP, yet you’re still constantly laughed at by your friends for investing in the new “fax machine.” Imbeciles. You know that if you do your due diligence you will find golden dot-com companies to invest in. One day one pops up on your radar. It checks all your boxes: strong team (the two founders of Borders books) and powerful institutional backing (Sequoia Capital and Benchmark Capital — later Goldman Sachs). The company is WebVan, an online grocer that promised 30 minute deliveries. In their ICO in 1999, they would raise $375 million before quickly exploding to $1.2 billion. Bullish? Disruptive? Sound familiar? Yet in July of 2001, the stock price dropped from $30 to 6 cents and WebVan lost $700 million in a day.
– Noam Levenson, Popping The Bubble: Cryptocurrency vs. Dot Com
And I haven’t even gotten to the technological challenges of Blockchain yet!
Revisiting the Cryptocurrency graph again, along with the excepts illustrating the development of the Internet-Dot Com Bubble, it is clear that we are in a Crypto one (Blockchain etc.) for a few reasons 1: the access to cryptocurrency 2. The massive availability of information via the internet, or “bullshit” information 3. The increase in unregulated changes that enable market manipulation 4. “And I haven’t even gotten to the technological challenges of Blockchain yet!”
Citing the technological innovation curve, and the view that we are in an “early majority” stage with Crypto, is perhaps a dangerously inaccurate citation with problematic implications—at least right now. We are in an early majority because of reasons 1 and 2 above—accessibility to cryptocurrency and “bullshit” information—and the reality is the current price of Crypto, especially if used a metric for technological adoption holistically, fails greatly. We can’t, or at least we shouldn’t view adoption with Crypto in context to investment and price, since there is no warrant for it correlating to technological growth.
A serious look into the technological innovation curve with regard to the Crypto market cap should be postponed until 1. More regulation 2. A greater diversity investors and 3. A more mature outlook on the crypto market and blockchain, which includes a narrowing of speculation and true adoption, requiring an understanding of feasibility and time scales of when true adoption comes to fruition.
A more mature outlook on crypto perhaps revolves around asking the right questions. Some of them boring, but fundamental—and maybe at this point, assumed—given what should be established as the importance of decentralization. Here, I believe it is important to reiterate the necessity of decentralization, and detach that in a larger realm of recreant excitement and speculation surrounding the infinite possibilities surrounding blockchain technology.
This is again, difficult, given the purely profiteers who inject use the importance of decentralization to artificially generate excitement that blockchain will revolutionize business, economies, and governments. However, this revolutionary potential ignores feasibility and timeframe, along with an immature understanding of what type of technology Blockchain is.
While the internet analogy homology is apparent, and the parallels behind Blockchain and the internet inevitable and clear (Blockchain as an evolutionary phase of the internet and “bubble”), it is easy to forget that blockchain and the internet are not identical technologies. This may seem obvious, but its emphasis is important, especially at this moment.
While many claim Blockchain disrupts this or disrupts that—Blockchain is not a disruptive technology, first. Phraseology and verbalism is incredibly important here amongst “hype.” Decentralization has the potential to have “disruptive” effects for sure, but in the meanwhile again, blockchain should not, at first be seen as a disruptive technology, but primarily a foundationalone.
Reading The Innovator’s Dilemma by Clayton Christensen is a must. Disruption is so misunderstood or usually so reduced that I will dedicate “Disruption Theory” in a separate blog post. But for the purpose of this post—here are the main tenets to Disruptive-Innovation with Crypto.
- Large companies depend on customers and investors, so the best performing and best managed companies listen to their customers and investors for maintaining profits.
- Large companies don’t particularly care, about small markets, and maintaining growth rate doesn’t align with an emphasis on small markets, along with their lack of big revenue and profits.
- Large companies care about data, but new markets can’t be analyzed since they don’t have data; extending this idea, it makes sense large companies want to avoid risk.
- Large companies don’t focus on disrupters, where the pace of technological progress can exceed therate of improvement.
You should probably read the book.
Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure. The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum.
Iansiti and Lakhani describe blockchain as foundationalin the depth of transformationthat will take place and time. The thesis is that foundational technologies recreate the foundations of our economy and social reality. Before I make my own claim about their prescription—I partly agree—I will look into where and how they are supporting this claim.
As with last article, I dedicated a good amount of paragraphs to revisiting the “Eras of the Internet.” Particularly the evolution and adoption of TCP/IP (transmission control provolone/internet protocol). If this is confusing, the one thing to understand is that Iansiti and Lakhani view TCP/IP and Blockchain as the true analogy, rather Blockchain and Internet. This is the foundational technology logic:
Traditional telecommunications and computing sectors looked on TCP/IP with skepticism. Few imagined that robust data, messaging, voice, and video connections could be established on the new architecture or that the associated system could be secure and scale up. But during the late 1980s and 1990s, a growing number of firms, such as Sun, NeXT, Hewlett-Packard, and Silicon Graphics, used TCP/IP, in part to create localized private networks within organizations. To do so, they developed building blocks and tools that broadened its use beyond e-mail, gradually replacing more-traditional local network technologies and standards. As organizations adopted these building blocks and tools, they saw dramatic gains in productivity.
TCP/IP burst into broad public use with the advent of the World Wide Web in the mid-1990s. New technology companies quickly emerged to provide the “plumbing”—the hardware, software, and services needed to connect to the now-public network and exchange information. Netscape commercialized browsers, web servers, and other tools and components that aided the development and adoption of internet services and applications. Sun drove the development of Java, the application-programming language. As information on the web grew exponentially, Infoseek, Excite, AltaVista, and Yahoo were born to guide users around it.
Once this basic infrastructure gained critical mass, a new generation of companies took advantage of low-cost connectivity by creating internet services that were compelling substitutes for existing businesses. CNET moved news online. Amazon offered more books for sale than any bookshop. Priceline and Expedia made it easier to buy airline tickets and brought unprecedented transparency to the process. The ability of these newcomers to get extensive reach at relatively low cost put significant pressure on traditional businesses like newspapers and brick-and-mortar retailers.
Relying on broad internet connectivity, the next wave of companies created novel, transformative applications that fundamentally changed the way businesses created and captured value. These companies were built on a new peer-to-peer architecture and generated value by coordinating distributed networks of users. Think of how eBay changed online retail through auctions, Napster changed the music industry, Skype changed telecommunications, and Google, which exploited user-generated links to provide more relevant results, changed web search.
– Marco Iansiti and Karim R. Lakhani, The Truth About Blockchain
To summarize the citation above, TCP/IP created the single use case of sending an email from one researcher to another similarly to how Blockchain technology can fascinate the transfer of a token through peer to peer exchange with Cryptocurrency, but TCP/Ip moved through phases of development. The description posited by Iansitii and Lakhani is the evolutionary phase of TCP/IP from single use, localized use, substitution, and ultimately transformation. This four stage framework, each as a quadrant, is significantfor Iansiti and Lakhani’s view:
- Single Use: The “first quadrant” are what is to be described as “low-novelty and low-coordination applications that create better, less costly, highly focused solutions.”
- Localization: The “second quadrant” are high in novelty but need a set of users to create immediate value, so adoption has less barriers. Here the rise of private blockchains for specific purposes and various industries is likely.
- Substitution: The “third quadrant” include applications both low in novelty and adoption given they are intended to build on existing single-use and localized applications. In context to cryptocurrencies, they would require every party that is involved with monetary transactions to adopt—requiring a complete overhaul of institutions—and a radical change in consumer behavior.
- Transformation: The “fourth quadrant” exists outside novel applications in that If successful, adoption would require change across all domains of life that requires institutional buy in, and in that regard, a complete alteration in institutions themselves.
I believe that Blockchain Technology should be viewed as a foundational technology to ease speculation and encourage an investment in technology. The four quadrants established above are incredibly useful in describing use cases—so they will be used later in this post. Blockchain Technology is in many ways the next TCP/IP for the Internet—its always been emphasized throughout “Unlocking the Block to Decentralization” as an evolutionary stage‚ however I disagree with the implication, but not the substance of the categorizations provided by Blockchain Technology as only foundational, and not disruptive. To be clear, I believe right now the theorization of Blockchain Technology is one of foundational, such theorization is significant given the overwhelming speculation and gap between investment and technology; however, when considering a few factors that include how there is a more conscious recognition and historical precedence from the Internet and what innovation entails, Blockchain Technology has the potential to be a disruptive innovation.
In our analysis, history suggests that two dimensions affect how a foundational technology and its business use cases evolve. The first is novelty—the degree to which an application is new to the world. The more novel it is, the more effort will be required to ensure that users understand what problems it solves. The second dimension is complexity, represented by the level of ecosystem coordination involved—the number and diversity of parties that need to work together to produce value with the technology. For example, a social network with just one member is of little use; a social network is worthwhile only when many of your own connections have signed on to it. Other users of the application must be brought on board to generate value for all participants. The same will be true for many blockchain applications. And, as the scale and impact of those applications increase, their adoption will require significant institutional change.
What I disagree with in Iansiti and Lahkani’s view is that novelty, to a degree, eventually results in coordination—this is the fundamental premise behind disruption theory. This is to say, even single use and localization cannot be undermined in their proliferation into widespread transformation and upheaval of institutions. Blockchain Technology fundamentals changes the existing value proposition in the market, currently does suffer poorer performance than existing solutions and has less capacities, possess functions only a few customers want, currently dismissed outright or evaluated by leading companies and institutions, has the capability to advance rapidly and deliver sufficient performance and better functionality than existing products, and the effect will most likely be more gradual…these characteristics are. by definition, disruption.
That being said, a lot of this assumes that Blockchain Technology will be done right.
– Marco Iansiti and Karim R. Lakhani, The Truth About Blockchain
Challenges to Blockchain Technology
A conclusion from above is that there should be an analytical focus on challenges and improvements to Blockchain Technology. I believe that once novelty in Blockchain can be perfect, complexity or adoption will take its course. But perfecting novelty is no easy process and current focus with speculation, or adoption is unproductive.
To better understand what sort how decentralized systems can be made a reality, understanding what Cryptonetworks are is not tangential.
Current platforms, or in a disruptive lens, incumbents, operate within a business model that involves setting up an online exchange for buyers to interact with sells, where a company embraces the role of the intermediary, and thus a transaction fee is charged.
An immediate problem resolved by introducing Cryptonetworks are a misalignment of incentives. Platform owners are for-profit companies that generate revenue by reducing utility of the platform through transaction fees.
Cryptonetworks are similar in that a decentralized system coordinated by an underling DLT(Distributed Ledger Technology) asset acts as the incentive mechanism to ensure everyone works toward the success of the network.
Cryptonetworks can each be thought of as their own enclosed economy with specific incentive systems, or systems otherwise to ensure productivity. While current economies measure economic activity through GDP, the process of measuring economic activity is similar for a crypto network, with an expenditure approach, but such information would be on a public database. Crypto networks are much narrow in focus and highly dependent on the focus of the network.
Paralleling long-term aggregate supply, short-term supply, and short-term aggregate demand, Crytonetworks are driven by long-term technological utility, intermediate-term ecosystem growth, and short-term market Prices.
(1) The technology utility trend is in years, where the improving the code base is manual, linear and structured.
(2) The intermediate-term Ecosystem Growth is in months with evangelicals moving towards a broader network effect.
(3) The Short-term Market Prices are in days and can swing on emotion.
Improves in these three categories will significantly determine the success of Cryptonetworks.