Does Survival of Cryptocurrency Technology Depend on Human Emotion?

Some technologies continue to exist even if their creators set them aside in favor of something else. A stone wheel remains a stone wheel, regardless of whether you use it. A printing press in a museum still operates precisely as designed, even though it’s been bucked in favor of digital printers. And combustion engines will still run on gasoline, even when the day comes that no one cares to use one anymore.
But this kind of staying power is not the case with the technology that underpins cryptocurrency: blockchain. If people stop caring about a given cryptocurrency, the blockchain that runs it will eventually die out.
How is this possible?
First, let’s review what a blockchain is and how it works. Despite its futuristic-sounding name, it’s actually a simple thing: a digital ledger maintained by a special kind of computer. Traditionally, a ledger is a piece of paper on which changes of ownership are recorded by hand. An ancient ledger might read that I have one sheep and you have three sheep. If either of us buys or sells a sheep, the ledger is updated accordingly. It tracks our account balances, so to speak.
As opposed to sheep, a blockchain records changes in ownership of its “base token.” A blockchain’s base token is also called its “cryptocurrency.” The Bitcoin network’s base token is a bitcoin, the Ethereum network’s base token is an Ether, and the Dash network’s base token is a Dash.
The people who run the specialized computers that execute account balance updates on the blockchain are called “miners.” If they own a competitive number of computers as compared to other miners in the network, they’re likely to win the right of entering an update to the blockchain. Making this update results in the creation of new base tokens — and the miner gets to keep them as his “pay.”
It’s these people who will make or break the future of cryptocurrency technology.
From the giant warehouses of mining computers in China to the little flash drive miner sticking out of your friend’s laptop, all mining efforts are focused on one thing and one thing only: turning a profit. For this reason, miners program their machines to only contribute effort to the cryptocurrency they estimate will bring the most profit — the network with the least mining competition and the highest payout. This is where human emotion begins to play a part.
Because none of us can predict the future, we’re left to make decisions based on how we feel. For example, no American can know for certain that a dollar will be worth anything tomorrow, but we feel pretty confident that it will be, so we choose to work in exchange for dollars today. If every dollar-holder in the world decided to sell all their dollars for something else tomorrow, however, the infrastructure that runs the dollar — that is, the partnership between the Federal Reserve and U.S. Government — would die.
So it is with a blockchain. Whereas all dollar-holders cast an implicit vote in favor of the humans running the U.S. Government and the Federal Reserve, the holders of any cryptocurrency similarly cast a “yes” vote to the humans who make up that network’s infrastructure – its miners.
A dollar collapse tomorrow is exceedingly unlikely due to the gargantuan demand for dollars at this time. The same cannot be said for each of the more than 1,000 (yes, more than 1,000) cryptocurrencies that can be bought and sold using online exchanges today. Some of these cryptocurrencies have a mere five, six or seven-digit market capitalization, which could feasibly be wiped out tomorrow by a mere whiff of bad news — the creation of a bad feeling. And still, other cryptocurrencies have fewer than 20 miners, meaning that on a bad day, the said blockchain is less than 20 peoples’ feelings away from extinction. Does that seem far-fetched? Here’s a list of hundreds of dead blockchains.
Some have called the advent of cryptocurrency the “Wild West” of money, and they would be correct. And like the Wild West, crypto country is rife with two things: opportunity and risk. It is unreasonable to believe that over 1,000 cryptocurrencies will survive in the long-term. Why? Because miners will eventually begin to coalesce around just the most profitable blockchains – the networks whose base tokens they feel will either retain their value or increase. In other words, miners will eventually want to be paid in the base tokens that shed the title of “cryptocurrency” and organically take on the more familiar one of “money.”
Cryptocurrency technology — that is, blockchain technology — may or may not win out in the long run. But, if there’s one thing society cannot function without, it’s money. Across the world, human emotion appears to be moving in favor of the transparency offered by blockchains. If this trend continues, it is almost certain that at least one cryptocurrency will see phenomenal adoption in the years to come. Which one will it be? The answer to that question is still far from settled. This Wild West has only just been discovered, and everyone’s still trying to work out how they feel about it.
Guest post by Amanda B. Johnson of Dash

Should Banks Be So Fired Up About Bitcoin or The Blockchain?

In my book Shift, I said open source movements like Bitcoin are the wildcards that keep the economy moving in strange and unpredictable directions. It is disruption as a way of life. Built on blockchain technology, surrounded by an immediately scaled, global community, Bitcoin feels like a very Napsterish moment, shifting the way people think about distribution (in this case the distribution of value) without necessarily having all the credentials to be the fundamental building block of change (see a well argued, opposite viewpoint here).
Yet many banks are bullish about the blockchain (way before any proof of concept has given them good reason). Why?
The first reason is that many banks have serious legacy technology problems that get multiplied when they contemplate interacting with other bank legacy problems. Blockchain seems like a very simple ledger, one you write to once, gain instant agreement (through cryptographic discovery or some kind of consensus algorithm, in the case of payment and settlement startup Ripple) and then move onto recording the next transaction.
One shared record is immutable and cuts out any process errors that arise as records are transferred between different systems or curator costs that come with having a custodian be the record keeper, as happens now.
The second reason is that banks have now separated out their innovation functions from their execution funtions. it is possible, if not too easy, for innovation departments or technologists that have been granted Google time to rethink processes, to play with the blockchain and be seduced by its apparent simplicity
Business Insider quotes Aditya Menon, MD of global digital strategy at Citigroup:

On the blockchain, there are two parts that interest us. One is, today we are one of the largest movers of money -up to $1 trillion or more on a daily basis – because we’re the only bank that actually operates in 100 countries. So, there is obviously an opportunity around our own general ledgers.

If you are head of global digital strategy then you have to be looking at blockchain but that doesn’t make it the right technology for banking functions. Citi is taking a slightly bolder step by experimenting with its own currency CitiCoin (BNY Mellon has dome something similar internally by using a digital currency to reward staff).
While the idea of moving so much money around appears highly scaled, think of the number of API calls per day on the servers of companies like China’s Alibaba and TenCent. Hundreds of millions of users (350 million active users for Alibaba; annual orders, 12.7 billion, deliveries 4.3 billion) in the world’s largest Intranet (China), these systems run on best of breed web technology managed through a continuous process of code reduction and system improvement built into the working practices of the programming community.
Scale, in other words, doesn’t necessitate the blockchain – probably the opposite as blockchain is difficut to scale.
Banks though are keen on what they call the distributed ledger aspect of blockchain, one where consensus is created by the ledger being openly available to all participants. However, Bitcoin is a replicated ledger rather than a distributed one – each instance, each transaction, the whole blockchain is continuously replicated across the servers of all participants. Replication negates the value of a distributed computing system.
And in a sense bank-led digital currencies bring the banks into conflict with the startup community and possibly regulators – Ripple has its own currency XRP, which operates as a kind of token for money flowing through the Ripple system. Competition is no bad thing, in principle, but bear in mind the Fed and the Bank of England have also talked about creating digital currencies (and they are not the only central banks to do so) – much more of this and we will need a derivatives structure to de-risk the different valuations between fiat-backed digital currencies, a development that would be just self-defeating.
If you then ask why are the bank so interested the answers are:

  • They have to be – they are struggling to find radical cost reduction and the blockchain could (but won’t) be it.
  • They have embraced innovation and it would be tough to turn a blind eye to the possibility of blockchain, though in reality it would be more courageous to do so.
  • It provides built-in thought leadership, a feature startups are only to happy to cultivate – we have yet to see  a senior banker though create a real vision for the future of finance; blockchain provides that thought leadership, even though most banks are already advocates at some level, so the search for leadership increases the sense of a race.

I think the lessons from the blockchain gold rush are:

  • Ok, it pays to look at options but you need to be looking at viability at low cost (a fact that some banks get), what one might call minimum viable optionality. Blockchain should be put in perspective quickly, by a disciplined process of low-cost viability testing.
  • Look to how web pioneers are handling much larger record systems than banks do. The answer lies in highly granular innovation processes where developers fight for great fixes and are smart enough to take the latest ideas and push them to new limits.
  • And finally don’t be too preoccupied with your own needs – what do bank customers’ want? That should be the guiding principle of the minimum viable option.

 

TransferWise raises $58M in Andreessen Horowitz-led Series C

London-based online currency transfer outfit TransferWise has raised a $58 million Series C round that was led by Andreessen Horowitz. This follows a $25 million Series B round just seven months ago, which included Virgin chief Richard Branson and original backer Peter Thiel (who are also in the current round, along with Index Ventures, IA Ventures and Seedcamp.) Like CurrencyFair over in Ireland, TransferWise uses cash reserves in various countries to bypass the banks and offer conversion rates that are far cheaper than those offered by traditional banks and remittance services. According to the Financial Times, Andreessen Horowitz won a competitive bidding process to invest in TransferWise, which is now valued at “close to $1 billion”.

Belarus blocks news and commerce websites over currency fears

Fearing a run on banks and shops due to a faltering currency, the authorities in Belarus have blocked several news and e-commerce websites, according to reports. The Belarusian state-controlled economy is closely linked with that of Russia, and the slide of the Russian ruble has spooked the Belarusian authorities, who introduced a 30 percent tax on foreign currency purchases. On Saturday, the authoritarian state reportedly blocked more than a dozen online stores that raised their prices or priced items in U.S. dollars, and also blocked several independent news websites without warning.

It’s not really about the bitcoin

Silk Road, Charlie Shreem, large-scale thefts from the Mt. Gox, Flexcoin, Vicurex, and Poloniex exchanges . . . Battered by regulators, hackers, and the lingering public perception of alternative currencies as tools of the underworld, bitcoin the currency clearly had a rough first quarter of 2014.
The next two years for bitcoin (lower case b for the currency) will surely be tumultuous as interest rates remain low and the nascent infrastructure for alternative currency trading continues its growing pains, making traditional payment methods and financial institutions more attractive. However, even if it survives, the important point to keep in mind is that this inordinate amount of public attention, engineering, mathematics and business talent, and investment dollars is being directed at such a tiny portion of the payments universe. According to Green Visor Capital there were only $6.9 million in bitcoin transactions in 2013 compared to $30 billion for Square, $200 billion for PayPal (one half on Visa’s system), $3 trillion via Citigroup, and $6 trillion through Visa.
Beyond bitcoin
So why all the excitement? It’s because Bitcoin (capital B for protocol or system) is arguably the next new frontier in social change and technology innovation. The collective talent and dollars being put into Bitcoin and other alternative currency services and infrastructure from the halls of M.I.T to the board room of Andreessen Horowitz are focused — whether they consciously realize this or not — on the creation of the next stage of the internet’s utility, from the internet of content to the “internet of value,” as Ripple’s Chris Larsen describes this sea change. And this internet of value promises a wealth of positive change, whether it’s increased competition (and lower costs for transacting parties such as merchants) in the payments space or faster and relatively frictionless money exchanges. Say goodbye to payday loans and exorbitant remittance fees. And in a perfect world, the merchants would pass on that one-plus percent interchange savings to their customers in the form of lower prices and/or better service.
Just as exciting, the rails of this new internet of value can be used for any transaction requiring trust to be established between two unknown parties. That is, just as you trust that the cash a stranger is giving to you at the store has its denominated value, the “general ledger” system of Bitcoin and its technology offshoots allow you to transact in a trusted manner electronically, and in larger sums without requiring an identity check or layers of middleman services. This opens the door to solving not only the problem of expensive friction-filled money transfers, but also to creating a system by which any valuable data set or signed document — such as contracts, wills, or mortgage papers — can be verified and legally transferred electronically with a high degree of certainty.
The future (and opportunity) is wide open

But that’s in the far future. Right now we’re still in Stage I. Whether you think of Bitcoin as Burning Man meets the new Occupy movement or the next generation of P2P, there is a fast-paced, character-filled, and at times surreal socio-political drama being played out between the haves (the payments power base and the governments that cater to them) and the have nots (the digerati that have so far been locked out of this space, not to mention the economy-battered customer caught in between) that is ripe for the next Tom Wolfe novel — if he’s up for it (hint, hint).
There’s much more about the real opportunity and all of the players in alternative currencies in my Gigaom report Beyond Bitcoin: Understanding the Opportunity in Alternative Currency Services and Infrastructure (subscription required).

€10m Transferwise blows a raspberry at bankers

London-based peer to peer currency exchange Transferwise has passed €10 million in transactions, saving customers nearly half a million Euros in fees that would have otherwise landed in the hands of the banking industry.