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How to Think About web3

In 2018, I compiled a mini-syllabus of writings about blockchain and cryptocurrency that was meant to help people orient themselves to what it is about the blockchain and cryptocurrency space that was new and important. That piece has held up remarkably well, but many things have changed since that time including the idea of web3 becoming much more prominent.

Without getting bogged down into the definitional gymnastics of what “web3” is or isn’t I thought it would be useful to put together an updated syllabus, of sorts, focused on some of these developments. The articles are addressed chronologically and build upon each other. The tl;dr is that the big promise of web3 is greater user control over their online experience and data.

The Articles

  1. The Dawn of Trustworthy Computing – Nick Szabo
  2. Money, Blockchains, and Social Scalability – Nick Szabo
  3. Protocols, Not Platforms: A Technological Approach to Free Speech – Mike Masnick
  4. web3 The Rise of the Aligned Web – Jon Stokes
  5. web3 Critics Misunderstand Decentralization – Chris Dixon
  6. Why Build in web3 – Jad Esber and Scott Duke Kominers

If you read these six articles my hope is that you will have all the intellectual framing necessary to appreciate why web3 may be the next stage of the Internet or decide that it is simply more hype for the insatiable hype train. Happy reading.

The Dawn of Trustworthy Computing – Nick Szabo

This blog post was originally featured in the 2018 mini-syllabus, and the central theme of the post is how we trust computers to act in certain ways, and how we might better manage trust, in general. The author, Nick Szabo, is controversial, but his piece is timeless in our age of deep fakes, generative AI, and online disinformation. This is a dense, but worthwhile read.

Money, Blockchains, and Social Scalability – Nick Szabo

One more blog post from Nick Szabo, but this post dives deep into the social aspect of these new types of networks. In particular, the post introduces the idea of social scalability, which in a sense includes everything that occurs off-chain and how one might think about managing incentives.

Protocols, Not Platforms: A Technological Approach to Free Speech – Mike Masnick

This is the most academic piece of writing of the bunch. The author, Mike Masnick, is a prominent tech blogger and the founder of Techdirt, which is always a great read. The piece gives an excellent treatment to how we might reimagine speech online and makes a compelling case for switching “…to a world where protocols and not proprietary platforms dominate would solve many issues currently facing the internet today.”

web3 The Rise of the Aligned Web – Jon Stokes

This piece from Jon Stokes, co-founder of Ars Technica a prominent tech news site, is the most important piece of the bunch. Why? Stokes does a masterful job of laying bare the nature of our relationships on the Internet, especially with respect to platforms. The post also makes clear why web3 may change those relationships.

web3 Critics Misunderstand Decentralization – Chris Dixon

This short blog post derived from a tweetstorm from a16z venture capitalist Chris Dixon focuses on the network potential of web3 and how it empowers users even if some of the user interaction is via centralized services that are not themselves decentralized. Decentralization is an oft discussed, rarely understood concept in the web3 space, but this post goes a long way to further your understanding of decentralization.

Why Build in web3 – Jad Esber and Scott Duke Kominers

This last piece in Harvard Business Review makes the case that launching a web3 company is easier for a variety of reasons and that users will ultimately benefit. Mr. Esber runs a web3 company and Prof. Kominers is a professor of entrepreneurship at Harvard. One great part of the piece is how it focuses on the benefits to growing the total pie for both companies and users.

Conclusion

If you read these six blog pieces you will not know everything there is to know about web3. You will, however, have a much deeper understanding of the potential of web3 and hopefully be able to identify where it may fit into your business and life.

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Cryptocurrency goes Geopolitical

Up until Saturday February 26th, the use case for cryptocurrency as a geopolitical tool has been a mix of hypothetical, erratic, and at times criminal. That all changed with one tweet. The Ukrainian government tweeted out a request “[n]ow accepting cryptocurrency donations. Bitcoin, Ethereum and USDT.” A European country at war was requesting cryptocurrency to fund its defense. Regardless of whether any such donations help change the course of the tragic events unfolding in Ukraine, this is crypto’s geopolitical watershed moment.

For much of the past thirteen years, since the world’s first cryptocurrency Bitcoin launched, the world has been able to dismiss cryptocurrency. Invented as a means to digitally transact directly (peer to peer) without the need for a central counterparty, the technology has ardent evangelists and critics, as does most frontier technology. The past few years have seen tremendous economic activity surrounding the industry and mainstream adoption as seen through this year’s four Super Bowl Commercials run by crypto companies. The total value of all cryptocurrencies worldwide is approaching $2 trillion.  If Crypto was a country, it would have an economy stronger than all but 9 countries on Earths. These indicators of economic success paired with a boom in mainstream interest in blockchain use case NFTs (non-fungible tokens) have opened the industry to millions of new entrants. But short of a few countries who have dabbled with the idea of their own digital token, the political implications of the technology have largely been ignored. Those days are numbered.

They say cash is king, but recent events suggest it may have to share the throne. People need a way to exchange with one another as stable society conditions deteriorate, but those deteriorating conditions make it hard to access cash. Last week for example, as the invasion of Ukraine began, the National Bank issued limits to how much cash people could withdraw.  In 2015, Boston University researchers explored the use of bitcoin in conflict zones and, according to Professor Daivi Rodima-Taylor, found potential that “digital currencies as a technology offered a means to enhance what is already a diverse ecosystem of remittance methods.” This was not a surprise finding – as early as summer 2011, the organization WikiLeaks solicited donations in Bitcoin to continue funding operations after it faced in the words of its founder Julian Assange an “extralegal US banking blockade.” Stories abound of refugees and dissidents around the world, such as during the Syrian crisis, using cryptocurrency to store their savings as they sought refuge in other countries.

What does it say about the value proposition of cryptocurrency that in the midst of a political and humanitarian crisis the government of Ukraine turned to cryptocurrency donations to help their cause? For one thing, the supposed veneer of illegitimacy surrounding cryptocurrency has been shed. In the direst of situations, the Ukrainian government has been looking for help wherever it can get it, and the ability of individuals around the world to send cryptocurrency to a war zone was near the top of the list. According to Ukrainian Minister of Digital Transformation Mykhailo Fedorov, total donations in cryptocurrency to the Armed Forces of Ukraine grew to $ 12.7 million in just two days. This is the first time that cryptocurrency has been front and center in a geopolitical event this significant. The future remains very much uncertain, but cryptocurrency is now part of the geopolitical conversation moving forward.

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Smart Contract Patent Update

A quick update on the growing smart contract patent landscape. I’ve written before about the number of patents mentioning smart contracts here, here, and here. The number of filings continue to grow at a rapid pace.

As of May 30, 2018, we know of 267 patent filings in the USA that mention “smart contracts.” These filings include issued patents, and published patent applications. There are surely more we do not know about. The chart below shows a breakdown of filings by the year they were filed.

 

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Blockchain Mini-Syllabus

A mini-syllabus to understand the hype

When reading about the Blockchain space it can be very hard to separate the wheat from the chaff, especially for people just starting to learn about the technology. This problem is compounded by the prevalence of so much hype literature, and fluff, that does not do a good job of explaining why someone should actually care about this technology.

So, in an effort to address that problem I have put together a mini-syllabus of articles about blockchain, cryptocurrency, and smart contracts that are able to explain what is going on at a high level, and give concrete reasons why this technology may be so transformative.

Before I list the articles, and give a brief synopsis for each, I want to acknowledge that this effort is by definition incomplete, and somewhat subjective. There are many articles that could have been chosen, but these five articles have held up well, and will likely continue to hold up well in the future. Also, the articles were chosen for their broad treatment of the technology and it’s potential societal impact.

The Articles

  1. Why Bitcoin Matters — Marc Andreessen
  2. The Dawn of Trustworthy Computing — Nick Szabo
  3. Bitcoin and Blockchain: Two Revolutions for the Price of One? — Richard Brown
  4. Programmable Blockchains in Context — Vinay Gupta
  5. Money, Blockchains, and Social Scalability — Nick Szabo

If you read these five articles you should have a decent sense of what a blockchain is, what cryptocurrency is, and why those things may have a very large impact on how trust is managed in our world. I highly recommend you read the articles in the listed order, so you can build on the themes laid out in each article.

1. Why Bitcoin Matters

Marc Andreessen, the cofounder of Netscape and of az16, lays out the case for why Bitcoin is an important invention, but also dives into the business case for Bitcoin and other cryptocurrencies. This editorial is a good entry point to understanding the “so what” of cryptocurrency.

2. The Dawn of Trustworthy Computing

Nick Szabo’s entire blog, “Unenumerated”, is worth checking out given the breadth of topics covered, but also the depth Szabo goes into for each topic. This post gives you a full picture of how much we trust computers to behave in certain ways, and why a new way of managing trust enabled by blockchain may change many facets of society.

If you’re feeling ambitious, make sure to check out his “Wet code and dry” post that he links to at the bottom of the post.

3. Bitcoin and Blockchain: Two Revolutions for the Price of One?

Richard Brown is the head of technology at R3 where he is working on rebuilding finance with distributed ledger technology. In this post, Brown masterfully explains why large organizations are intrigued by blockchain, but not necessarily Bitcoin. The rest of Brown’s blog covering concepts in finance and where things are heading is worth your time.

4. Programmable Blockchains in Context 

Vinay Gupta helped coordinate the release of Ethereum in 2015. In this post, he lays the foundation for why something like Ethereum is compelling by giving a history of the technology that came before blockchain.  This post is a great primer on how humans have managed data in the digital age.

Bonus post: check out Gupta’s “A Brief History of Blockchain” at the Harvard Business Review.

5. Money, Blockchains, and Social Scalability 

Lastly, we have another Szabo blog post. I told you his blog was worthwhile. In this post, Szabo tackles issues of scalability related to blockchain, in particular, the issue of social scalability, which he defines as:

“the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors — to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate.”

This is the longest post, but arguably the most important of the five.

Conclusion

If you read these five blog posts you will not know everything there is to know about blockchain, cryptocurrency, and smart contracts. You will, however, have a very good handle on the basics, and should be able to understand the promise of this new technology class.

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Five Implications of Blockchain Technology

Lawyers are a natural fit to understand the implications of blockchain technology on society. Why? Lawyers can understand the implications of blockchain technology, because blockchain technology deals with concepts that lawyers have been wrestling with for millennia, namely: trust, exchange, agreement, consensus, and value.

Trust

Arguably the most central concept for organizing human society is trust. The degree to which people trust each other, and how they manage those trusted relationships is often intermediated by lawyers. Lawyers craft agreements for clients based on the level of trust between the parties to the agreement. Lawyers are not necessary for trust to exist, but they often bridge a “trust gap” between parties that do not know each other well. In this sense, lawyers function as trusted third parties.

With the advent of Bitcoin the trust equation changed. Now it is possible to “trust” information sent over a network you don’t trust among a group of participants you also don’t trust. To be sure, there is an element of trust that still exists. Namely, the participants in the network must trust the way the network is run, and the technology that underpins the network. The point is that lawyers have a natural affinity for managing trust relationships, and they should not be turned off by this new technological approach.

Exchange

What does it mean when parties exchange something between each other? The concept of exchange, giving something to someone else and receiving something in return, is the foundation of all trade and many of our interactions as people. Exchange has many issues associated with it, such as:

  • What are the terms of the exchange?
  • Are the terms of the exchange clear?
  • When has the exchange started?
  • When is the exchange complete?
  • When would it be unfair for it to not finish?

Many more issues can arise, but these sorts of questions are common place in the legal world.

For networks that use a blockchain, distributed ledger, shared ledger, or other decentralized exchange network, the answers to these questions are often found in the network protocol. The protocol determines how exchanges work and what types of exchanges are possible. Similarly, the protocol will also determine the involvement of other parties in said exchange. Knowing the rules of exchange is something that lawyers already advise their clients on, and answering those same questions with respect to blockchain applications is something they can and should do.

Agreement

In many cases agreements are often contracts, and contracts involve at least two parties coming to a meeting of the minds as to the terms of their agreement. That’s a wordy way of saying “I’ll do X, if you do Y.” Historically, agreements have been memorialized in a contract. Problems arise when one of the parties claims that the terms of the contract weren’t met, or that the contract was invalid.

Blockchain technology creates the opportunity to create binding agreements on a blockchain network. A potentially huge shift in the practice of law is likely to come in the form of smart contracts. A smart contract is a way for at least one party to memorialize the terms of an agreement in computer code that is distributed across a blockchain network.

The lawyer’s traditional role of helping clients come to an agreement on a contract will not change as a result of smart contracts. What may change is how that agreement is memorialized. Here lawyers would do well to learn about smart contracts and how to code them. With each passing year more and more clients will want that option.

Consensus

Traditionally, consensus on the veracity of information in a network (be they financial networks, groups of experts, etc.) has involved reconciliation processes and other mechanisms to determine what information and records are correct.

Perhaps the biggest change brought on by Bitcoin and other blockchain networks is a new way of achieving consensus on information transacted on a network. As transactions occur on a blockchain they are packaged into blocks of transactions. If certain conditions are met that block becomes part of the official record and the chain of blocks grows. If enough participants in the network agree, that block becomes part of the official record and consensus is achieved.

Determining when and how consensus is achieved is well within a lawyer’s toolkit. Being able to assess whether information is part of the official record is something lawyers already do, and something lawyers will have to do more of when their clients wish to use blockchain technology.

Value

A concept more abstract than trust may be value. What is valuable to one may be valueless to another. How and why we value something may be intrinsic to the thing in question, or extrinsic to that thing. Regardless of why something has value, lawyers often help their clients determine the value of things. They also help clients secure valuables, as well as ensure their client receives fair value in an exchange.

In disputes, lawyers often have to advocate why something should be valued a certain way on their client’s behalf. The fact that magic internet money is valuable to some, and not valuable to others, is largely irrelevant to the job of an attorney. Thinking abstractly about why something is or isn’t valuable is already a large part of the job.

Conclusion

Lawyers should not be worried about blockchain technology. In fact, they should embrace this new paradigm shift towards decentralized interactions. The legal issues lawyers deal with day to day will not be disrupted by this new technology space. They will merely be presented in a new format.

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Blockchain Naughty List

I proposed on Twitter a list of the most misused words in the blockchain and cryptocurrency space.

My list was Immutable…Trustless…Game theory…Smart contracts…Cryptocurrency…Blockchain…

Not surprisingly my list was wholly inadequate. I omitted several words that are constantly misused. Thankfully, many people chimed in to round the list out.

Middleman…Distributed…Transaction…Ledger…Mechanism design…Decentralized…Censorship resistant…Disintermediation…Anti-fragile…Secure…Advisor…

I know I’ve misused all of these words. There are probably more words that should be included.

Generally speaking, I think the misuse of these words is a consequence of this being a new industry that is ridiculously multi-disciplinary. It is very easy to be imprecise when talking about the concepts involved in the space. Plus, no one in this space is an expert in all the different disciplines at play.

Basically, we should all probably tighten things up and keep on learning, because I think Angela Walch is right about how people are currently incorrectly using the jargon that makes up this space.

“Basically any word that describes how the tech is beneficial or what its characteristics or capabilities are.”

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Blockchain Patents

Say you’ve got a great idea to use “blockchain for [insert literally any problem domain]”. First off, congratulations! That sounds cool. Now you think to yourself, “I should patent that!” Maybe.

Before you go through the long and costly process of seeking patent protection there are some questions you should ask yourself, or your attorney should ask you.

Do you really need a blockchain?

This is the most important question, and one that requires serious introspection. Are you pursuing a blockchain technology solution because you are trying to capitalize on a hot new trend? Do you just need a new data storage solution? Have you really hammered out the pros and cons of using blockchain technology? Do you want to build your own blockchain, or use a public blockchain or some private blockchain service?

Your answer to these questions will of course depend on your goals, constraints, and the data you are dealing with. If you are convinced that you do want to pursue a blockchain technology solution to your problem you should have answers to at least the following questions.

What data do you hope to store using blockchain technology?

It doesn’t make sense to throw any old data in a blockchain. I mean, you certainly can, but that would be wasteful. Typically, you want to put “significant” data in a blockchain. For example, data that might be usefully stored on a blockchain may be mission critical data that you don’t want to lose, however, then the question becomes is access to said data time-sensitive? If the answer is yes then a blockchain solution may not be a good fit.

Have you considered any privacy restrictions on the data you are dealing with? For example, is the data personally identifiable information, such as healthcare data? If it’s healthcare data, have you properly walked through permission controls that need to be put into place? “We’re just storing a hash of the data!” you say, and yes that’s great, but are you really comfortable with that? Similarly, how will the data be entered into the system? Is the data going in solely under human direction? Is there some type of machine-machine communication going on?

Good candidate datasets for storage in a blockchain solution are “shared datasets that are shared amongst parties that do not fully trust each other.” That is, parties that may be incentivized to change data to the detriment of other parties involved in the network. Remember, blockchains are tamper-evident and so can cut down on funny business by participants that don’t have a majority of the computing power necessary to overrun the blockchain the data is stored in.

How are transactions handled?

Transaction verification should be trivial, but if you are not dealing with public blockchains (e.g. Ethereum, Bitcoin) then you may need/want additional verification steps. If so, what are the additional steps taken as part of the verification process? Even if your idea involves the use of public blockchains you may want to include additional transaction verification steps that occur prior to interfacing with the public blockchain.

Similarly, how is consensus handled in your blockchain solution? Inventing a new consensus algorithm is probably not a good idea. It’s better to use an existing consensus mechanism. This calculus changes if your blockchain solution does not make use of tokens that are native to your new fangled blockchain network. If you are not using tokens (e.g. bitcoin, ether) as part of your solution, why are you trying to use blockchain technology again?

Does this interface with legacy systems?

How do you envision your blockchain solution fitting into your existing business model? The blockchain solution will either interface with legacy systems or seek to replace legacy systems. Both paths have their own pitfalls, and their own patent considerations.

Along these lines, is your blockchain solution going to be solely internal to your business, client facing, or a combination of both? You need to consider exactly how your use of blockchain technology interacts with these internal systems and external systems.

Who is allowed to participate?

A blockchain network is made up of all sorts of different participants. Have you figured out who can participate in your blockchain network and how? Do you use an existing blockchain network, such as Bitcoin or Ethereum? If so, have you considered privacy requirements for your data, and how they might be met on those networks?

If you are designing your own blockchain network, are there checks performed prior to participation in the network? What would those checks look like? Accordingly, do you have a validation process in place to validate information used as part of any checks on participation? This is less of an issue if you are spinning up some sort of permissioned blockchain where there is a certain level of trust afforded each participant.

Conclusion

Blockchain technology is not a panacea for every problem you face. In fact, blockchain technology is really best suited to situations where you have participants on a network that don’t fully trust each other, want to update valuable data, and don’t fully trust the network. If that is not your situation, you need to think about at least the questions posed above, but probably many more.

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Denominated in Bitcoin

You often see people in the Bitcoin community use the market capitalization of Bitcoin to compare it to the money supply of other countries. In particular, the M1 Money Supply of countries is used as a metric to measure the value of all bitcoins against. For example, Jameson Lopp recently cloned the CIA’s numbers on M1 Money Supply around the world including the value of all bitcoins, which shows Bitcoin in 32nd place. These statistics are interesting, and certainly indicative of how far Bitcoin has come. At the same time, this is a narrow way to think about Bitcoin and its growth.

There are no shortage of people that believe Bitcoin, or more generally cryptocurrencies, will replace fiat money in the future. Thinking in these terms, why limit Bitcoin to the M1 Money Supply? Won’t Bitcoin become the market, as in all transactions will occur on the Bitcoin blockchain? Putting aside the probability, or desirability, of that outcome what does the world economy look like if it is denominated in bitcoin?

A couple of assumptions. Gross Domestic Product, or GDP, is more or less the standard metric used by economists to measure the economy of one country against the economy of another country, and so, that is what I’ll use. The underlying GDP and population numbers are from 2015 courtesy of the World Bank. GDP is problematic, but it’s a decent measure of the total “value” in an economy, and remember we’re talking about a scenario where all value is transacted through bitcoin. I’m using the total number of bitcoins mined, as of yesterday, (~16.66 mil according to blockchain.info) as the number of bitcoins. Sure, I could use twenty one million as the number of bitcoins, but we haven’t hit that number yet and we don’t know what the world’s economies would look like when that number is hit.

The chart below shows the country, the population, the Bitcoin In Country, or “BIC,” and the Bitcoin Per Person, or “BPP.” I’ve listed the top twenty-five countries, and the bottom twenty-five countries according to BIC. So, how many bitcoin does each economy have?

 

There is nothing terribly surprising about the countries listed above, because they are the largest economies in the world. What is interesting is what their economies look like in terms of bitcoin, and in particular the number of bitcoin held by each person in that economy. But, what about the bottom twenty-five countries?

 

Again, if you’re familiar with the poorest countries in the world you should not be surprised by the list of countries above. What is extraordinary is that if you have 8 bitcoin you would have more bitcoin than the entire economy of Tuvalu. Does this make sense? I have no idea, but it’s shocking to think about. If you had 353 bitcoin you would have more bitcoin than each economy of the bottom 25 countries.

Conclusion

Denominating countries’ markets in bitcoin is another way to get a handle on what Bitcoin adoption means. BIC and BPP are indicators that help illustrate that point. Whether Bitcoin replaces all value transaction is a very open question, but if Bitcoin were to do that a person would not need to have a lot of bitcoin to have more bitcoin than many countries in the world.

Update: I added the full list of countries if you want to peruse them below.

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Misconceptions About Bitcoin

Bitcoin, blockchain, smart contracts, ICOs, word salad. 2017 has been a big year for cryptocurrencies, and blockchain technology. Bitcoin is the original cryptocurrency, and it is a massive understatement to say that it is not widely understood, but below are a few common misconceptions widely held.

“You have to buy a whole bitcoin.”

False. You can buy a fraction of a bitcoin, because bitcoin is by design extremely divisible. In fact, a single bitcoin is actually divisible down to eight decimal places: 0.00000001. That is in part why people are so excited about the possibility of micro-transactions using cryptocurrencies, because unlike the US Dollar (which is divisible down to two decimal places: 0.01) you can send very very small amounts of bitcoin on the network.

“I can hold bitcoins in a wallet.”

Not exactly. There actually aren’t any bitcoins in the bitcoin blockchain. At least not in the sense of pennies, nickles, dimes, and quarters. What is “held” at addresses are “unspent transaction outputs.” These are known as UTXOs. UTXOs are used as inputs into new transactions on the bitcoin network. Also, when you see a bitcoin “balance” when you open your bitcoin wallet you aren’t actually seeing an amount of bitcoin held by the wallet software. What you see is a total of UTXOs that you control through the use of private keys associated with the UTXOs. Put it this way, you can’t take your “bitcoin” in your “wallet,” and go home. The UTXOs live on the bitcoin network, and your wallet software allows you to access it.

“Bitcoin is anonymous.”

Not really. It is much more accurate to say that bitcoin is pseudoanonymous. With a combination of the Tor browser, VPNs, dark magic, and dumb luck maybe you could make bitcoin “anonymous,” but before you go down that route you should talk to Ross Ulbricht about how well that works.

Conclusion

There are many more misconceptions about bitcoin, but these are three I see time and time again. If you want to learn more about bitcoin you should check out Bitcoin.org, or CoinCenter.org. Both great sites, and great resources. Of course you can always just read the Wikipedia page.

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Blockchain Businesses and Users

The blockchain business space is convex. By convex I mean that the businesses developing in the space are either large organizations, or small startups. The space looks a little like the graph below.

This isn’t necessarily good or bad, it just is. On the right of the graph you have very large organizations, like Accenture, Microsoft, and IBM. On the left you have companies like Monax, Ripple, and Coinbase.

Given the relative newness of blockchain technology the distribution of companies into two peaks, one of small companies and one of large companies, makes sense. Large organizations have the resources to test out new ideas without too much disruption to their business. On the other side, small companies have the agility, and often exclusive competencies, to try and build businesses around new ideas.

On the flip-side, the blockchain user space looks similar to the blockchain business space. The early adopters are largely very small users (e.g. individual holders of bitcoin), and large enterprise institutions. The chart is effectively the same as that for the business space.

Until a “killer app” for blockchain is developed the chart above will not change, and widespread adoption will not exist. For widespread adoption to actually exist the blockchain user space will have to look something like the chart below.

When midsize and small organizations are using blockchain, say a trucking company in southern Illinois or a local grocer in Argentina, then blockchain can be considered to have made it, but that is a long way off.