Crypto is much more important than just bitcoin, blockchains, or any token or initial coin offering (ICO). It’s the future of the internet, and that means it presages the future of business, economies, media, politics, society, property, law, and much more – it will be at the heart of everything, just like the internet is today.
Crypto, along with AI/machine learning, AR/VR platforms, and computational biology (including CRISPR editing), are the next major wave of computing and the internet. The future is already here, it’s just started distributing itself. 🙂
- Bitcoin, with a $1TRN market cap in 2021, was the most successful tech project of the 2010s; it put crypto on the map, but isn’t even the most important coin or project.
- Internet protocols have been evolving for 50 years now and we’re seeing a surge of new ones in the crypto space that will have a massive technological, economic, social, and political impact. You have to understand the history of the web to grok this.
- The new state of the web likely started with the launch of Ethereum in 2015. Waves of euphoria, followed by large crashes, are common and normal.
- One of the key questions in how computing affects society, politics, economics, etc: Who has root access and control? Public blockchains are massively multiclient databases, where every user is a root user. You need the decentralized database aspect of blockchains, along with coins/tokens as a form of resource ownership to fund the projects and let users gain access to the tech, and a robust, global community of devs, users, and apps. Crypto is all three: blockchains with a governance/incentive structure of tokens/coins and an active community.
- The crypto economy is almost like a new alternative economy that’s being built, where people are not just trading bitcoin. They’re earning a living. They’re launching new start-ups — crypto start-ups. They’re borrowing and lending. They’re doing all different types of economic activity, buying products and goods and services.
- Bitcoin is an older, reserve currency alternative that competes with gold, USD/EUR/JPY reserves. Ethereum is a decentralized, global universal computer and is the most important crypto project – it’s a lot more than just smart contracts. There are many new and important protocols and apps coming out beyond these two, despite the 95%+ of fraudulent, hyped, or incompetent projects (like Dogecoin).
- Watch DeFI! It’s going to challenge the global financial system and regulators in a big way. I expect a big crash (just like any financial innovation, such as stocks, bonds, derivatives, etc), but then a resurgence as a dominant financial protocol layer with many banks, insurance companies, and more built on it.
- In 2021 crypto is going through another massive boom, which I full expect will end in another bust. I don’t know when or how much the fall of tokens will be (80-90%?). But the speculative fervor has been genuinely helpful in bringing devs and users into the space, and the longer term future is quite bright.
Internet Protocols and the Web (A Gentle Introduction)
Despite how most humans experience it, the internet is not magic. From the physical computers of your laptop or phone, to the routers connecting to cable or fiber optic modems, to the servers at your internet service providers local nodes/data centers, there are a set of physical computers (mostly a commodity) connecting with a set of open software protocols that are 50 to 60 years old.
A protocol, in computer science, is just a set of rules or procedures for transmitting data between any electronic devices, from computers to your smart speaker or mobile phones. The US defense department in 1968 put up the first version of the internet, the ARPAnet, with some simple protocols for packet switching (moving data between computers), and then funded research into better versions called the Network Control Protocol, and in 1973, the Transport Control Protocol / Internet Protocol, also called TCP-IP, which is the basis of the modern internet. Other important protocols over time were the User Datagram Protocol (UDP, for dumb packet transfer) and the Domain Naming System (DNS, so we could have easy names like http://www.amazon.com instead of 184.108.40.206).
Other important internet protocols over time, which can be seen as layers living on top of the older layers:
- A hierarchical model of routing, with an Interior Gateway Protocol (IGP) used inside each region of the Internet, and an Exterior Gateway Protocol (EGP) used to tie the regions together.
- The File Transfer Protocol (FTP) is a standard communication protocol used for the transfer of computer files from a server to a client on a computer network.
- The Simple Mail Transfer Protocol (SMTP) is an internet standard communication protocol for electronic mail transmission. Mail servers and other message transfer agents use SMTP to send and receive mail messages.
- The Hypertext Transfer Protocol (HTTP) is an application layer protocol for distributed, collaborative, hypermedia information systems. HTTP is the foundation of data communication for the World Wide Web, where hypertext documents include hyperlinks to other resources that the user can easily access, for example by a mouse click or by tapping the screen in a web browser.
A key reason why protocols work is that they are common standards. You need an open, technocratic process to develop ideas, and a documentation process to write them down, get comments, and agree by persuasion. The internet developed RFCs for this. In 1969 a UCLA researcher established the Request for Comments (or RFC) series of notes. These memos were an informal fast way to share ideas with other network researchers. At first the RFCs were printed on paper and distributed via snail mail. As the File Transfer Protocol (FTP) came into use, the RFCs were prepared as online files and accessed via FTP. Now, of course, the RFCs are easily accessed via the World Wide Web at dozens of sites around the world.
You need a trusted, neutral community to agree on these standards. Running this group and the processes were the Internet Architecture Board, under the auspices of the Internet Society, working with the IETF and IESG for the approval of standards. For the web, a new coordination organization was formed, the World Wide Web Consortium (W3C). It took on the responsibility for evolving the various protocols and standards associated with the Web, a layer on top of the older internet layers. More detailed internet protocol history is here and here.
The internet and web came in waves:
Pre-web internet (1969 to 1990): from ARPAnet to the CSNET, this was the early period when the military and academic communities built many of the early protocols that made the internet a niche tool.
Web 1.0 (1991 to 2001): With desktop ownership growing at home, it took the release of the HTTP protocol in 1991 and Mosaic as the first web browser in 1993, along with the commercial opening, to really launch the first web wave. Early Linux in the 1990s became the open-source operating system, and the email, instant messaging, search, and VOIP (video/voice) led to the boom and the first tech craze. Note that most of this was done by startups or newer players/ISPs like Prodigy and AOL.
Web 2.0 (2002 to 2014): After the global tech crash, the world saw the rise of web apps (Facebook, Yelp, etc) to mobile apps with the iPhone and Android launches (Uber, Airbnb, etc). There was a massive shift from desktop to mobile and IoT devices, and lots of free, advertising driven apps (Gmail, Facebook, search, etc). Linux and the Apache Foundation projects became the open source powerhouses while AWS built cloud primitives to further re-centralize the web in cloud servers and empower large companies and new startups. There was another battle between closed versus open systems and the closed ones mostly one (the big tech consumer and enterprise apps). Also national governments started to hive off the internet (esp. China and Europe).
Web 3.0 (2015 to today): In hindsight, Bitcoin presaged the third wave, but Ethereum was the really magical technology that kicked it off. This continued all of above waves, but added crypto and pervasive AI/ML systems (after AlexNet in 2012, Google replaced all their older systems with ML systems over 5 years); this was to personalize everything. We are deep in this AI/ML and crypto world today, but most people don’t realize it (not even most engineers, who haven’t upskilled to ML frameworks or the new crypto languages, and hence there are big dev shortages). I expect future web/computing waves to include AR/VR, neural links, and massive crypto communities and DAOs that overtake AWS and power the core of a global internet.
Finally, think of the internet as a series of layers (the OSI Model, image below), with physical hardware at the bottom (servers, cables, etc) and mostly software at the top (but also client devices like iPads and iPhones). The “end user layer” is what most people see – the apps on their phones and computers – the rest is hidden but quite important. Lower layers are older and dumber; generally, higher layers are more programmable and software-based (and are where most companies were built).
Centralization vs Decentralization in Computing
One of the key questions in how computing affects society, politics, economics, etc: Who has root access and control? “Root access” is basically who is the admin of a system that can let people in and give them permissions, or kick them off. Right now, in the US, you could say Congress and the President have root access to the country, with some constraints from the courts and the constitution. For most consumer tech, a handful of West Coast tech companies hold root access with the founder/CEO (Zuckerberg, Nadella, Dorsey, Bezos, Cook) or their delegated appointees wielding the root access, holding power over billions of people. If the root access dictator doesn’t like you, they cut you off (like the Great Firewall in China, Twitter/FB for Trump/BLM/QAnon, AWS for Parler, Apple for the FBI, etc).
What happened with the internet is that the protocols below that did much of the work were a thin layer, where the IETF committees didn’t capture the economic or political value. They created neutral structures where the value was captured by larger tech companies building internet applications (the final bit at the top – the “end user layer”).
Enter blockchains, cryptocurrency coins/tokens, ICOs, Bitcoin, and Ethereum. I’m not going to explain them here, as that would take too much time, but this short explanation will give you an overview (or you can click on the links for the wikipedia article on each). You should understand these before reading further!
What makes crypto different is that value is created and captured at the fat protocol layers below – all the stuff with Layer 1 to 3 of blockchains. As Joel Monegro notes:
When a token appreciates in value, it draws the attention of early speculators, developers and entrepreneurs. They become stakeholders in the protocol itself and are financially invested in its success. Then some of these early adopters, perhaps financed in part by the profits of getting in at the start, build products and services around the protocol, recognizing that its success would further increase the value of their tokens. Then some of these become successful and bring in new users to the network and perhaps VCs and other kinds of investors. This further increases the value of the tokens, which draws more attention from more entrepreneurs, which leads to more applications, and so on.
I used to wonder what was more important. The decentralized database aspect of blockchains? The tokens as a form of resource ownership that you could spend to use it? Or the community of devs, users, and apps? I now realize you need all 3. The block chains (or Merkle trees) give you the pure tech part, but the token system incentivizes developers to build, investors to fund it, and early adopter users to jump in and build up a network effect. All three matter; either one by itself is useless (blockchains without tokens or communities are dead tech, or tokens with chains but no community are empty).
Public blockchains are massively multiclient databases, where every user is a root user. The community decides as a whole how to use compute, storage, applications, etc, not a small group of engineers and product people. In a world where data is central to everything, whoever controls the data is king, and the current data lords make it hard to import or export it, to share it broadly. Public blockchains enable shared state (think shared truth, shared control, shared internet ownership) by incentivizing interoperability. Per Balaji Srinivasan, “They convert many types of data import/export problems into a general class of shared state problems. And they do so in part by incorporating many of the best features of the mechanisms described above.
- A canonical API without centralization. Public blockchains provide canonical methods for read/write access like a hosted corporate API, but without the same platform risk. No single economic actor can shut down or deny service to clients of a decentralized public blockchain like Bitcoin or Ethereum.
- Lossless import/export. Public blockchains also enable individual users to export critical data to their local computer or to a new application like JSON/CSV/MBOX (either by sending out funds or exporting private keys) while providing cryptographic guarantees of data integrity.
- Incentivized interoperation. Public blockchains provide a means for arbitrary economic actors (whether corporations, individual users, or programs) to seamlessly interoperate. Every economic actor who reads from a public blockchain sees the same result, and any economic actor with sufficient funds can write to a public blockchain in the same way. No account setup is necessary and no actor can be blocked from read/write access.
- Cryptographic data integrity. And perhaps most importantly, public blockchains give financial incentives for interoperability and data integrity.”
To wit, public blockchains are massively, multiclient open state databases where every user is a root user. That means all the users and devs own and control the internet together, not a government (China) and not large tech companies (AWS, GCP, Facebook, etc). What was getting scary and centralized (think surveillance in China, censorship in the US, etc) becomes safe and decentralized again. Note that blockchains are still very inefficient databases in 2021. A simple Cassandra, DynamoDB, or Redis databases is much more performant – but with these, some entity you may not like has centralized root access. You have to trade off this centralized efficiency, which works for some use cases, with less efficient but more robust, open, and shared decentralized blockchains with tokens.
Crypto is a new world of decentralized internet protocols that need community consensus (there’s no dictator and the community can always fork the project). It does what early successful internet protocols did, by building a “rough consensus and running code” (just like the IETF, Linux, and Apache foundations did it). You need both tokens and blockchains, with users and devs as co-owners with shared root access.
What is the “Crypto-economy”
The crypto economy is what happens when you translate these wonky internet protocols into a startup and economic structure that serves billions of people globally (anyone with a smartphone or computer).
Brian Armstrong of Coinbase described it this way:
“The crypto economy.. is almost like a new alternative economy that’s being built, where people are not just trading bitcoin. They’re earning a living. They’re launching new start-ups — crypto start-ups. They’re borrowing and lending. They’re doing all different types of economic activity, buying products and goods and services. That part is still newer. Most people come into crypto, and they just trade a little bit as their first experience.”
But they go from trading digital assets to owning more and then doing more commerce in there. Amazon and Walmart.com will go from closed platforms to open retail ones, as will all the streaming services and eventually all the banks and financial services. The crypto-economy will eat the digital economy, just as software and the digital economy are eating the rest of the world.
Ultimately every asset, every social transaction, every search and post, every group or communal decision, every constitution, charter, or protocol, can live in applications in the crypto world, on systems and layers on top of chains with tokens and communities governing them. And as the crypto-economy eats the real economy, it starts to take over media, politics, society, and the messier, larger institutions.
Bitcoin as the first crypto protocol – decentralized reserve currency
Bitcoin is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The currency began use in 2009 when its implementation was released as open-source software. Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
Bitcoin started as a payments alternative but that was clumsy, slow, and expensive, so it pivoted to a reserve currency or “digital gold”. The community of devs, miners, and owners are conservative and have vetoed any change, so that spawned transaction alternatives like Litecoin, Ripple, Monero, and more as alternatives. In 2020, the market cap crossed $1 trillion, making it the most successful tech project of the 2010s, and also the most controversial.
While Bitcoin proved the value of crypto and the original whitepaper is one of the great CS achievements, in the long run I’m ambivalent about it. It is very inefficient and consumes vast amounts of power. It’s basically clunky old tech that has one narrow (but important) use, to compete with gold, US dollars, Euros, or Japanese Yen as a single global reserve currency while these countries’ central banks are massively inflating and distributing their currencies based on short-term political pressure. What is any currency worth? Ultimately it’s a social game based on trust and usage, so just as gold and the USD are hard to value, I don’t know what Bitcoin is worth (though I do think every diversified portfolio should hold some). My question is, is Bitcoin like gold and here to stay for a long time, or is it like AOL, a temporary winner that will go away? I don’t know.
Ethereum as the second crypto protocol – decentralized compute
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (ETH) is the native cryptocurrency of the platform. It is the second-largest cryptocurrency by market capitalization, after Bitcoin, though Ethereum is the most actively used blockchain. The platform allows developers to build and operate decentralized applications that users can interact with. The most successful so far are Decentralized finance (DeFi) applications that provide a broad array of financial services without the need for typical financial intermediaries such as brokerages, exchanges, or banks, such as allowing cryptocurrency users to borrow against their holdings or lend them out for interest. Non-fungible tokens on Ethereum will be the basis of all future digital assets, then all physical assets (why have thousands of fragmented county, state, and national land registries, broker records, etc when it can all live on a single, distributed chain?). I’m most excited about Ethereum – it’s foundational and important tech that will change the world.
Think of it this way. Bitcoin is a dumb reserve currency competing against some money. Ethereum is a massive, programmable, universal computer, where root access is shared by the global community of devs and users. From smart contracts to a Turing machine on a blockchain, it’s like a very simple AWS EC2 server on a blockchain. Just as the first AWS service of EC2 (cloud servers) massively changed the world of tech and software, the impact of Ethereum will be even larger. One great thing about the Ethereum community is that it wants the protocol to improve and get better, hence the upgrade to V2 (moving from proof of work to proof of stake, wiwth other performance and efficiency upgrades).
The downside of Etheruem is the bigger attack surface. Like any computer, it can be attacked where bad contracts can be dismantled and so bad actors can do nasty stuff (like steal tokens, take over assets, take over apps, etc). While Bitcoin has proven to be robust and relatively stable to attack, we don’t fully know with Ethereum. While Ethereum is far ahead of its competitors (Cardanao, Eos, Binance smart chain), it’s a very competitive space for the time and effort of devs and end users.
Decentralized protocols and applications (DApps)
The history of computing is that primitives and protocols are built first, such as: compute, storage, fast memory, identity, networking, file systems and file sharing, etc. Then come the more usable layers of applications like word processing, emails, images, video, audio/video streaming, messaging, cab hailing, etc. The world of early protocols and the decentralized apps (dApps) built on top them is emergent. Most crypto projects today are fraudulent or incompetent (hello Dogecoin!), but a handful have promise to change the world. Below are a few I follow.
Filecoin / IPFS: Inter-planetary file storage – decentralized storage that combines the best of Tor, distributed hash tables, content addressing, and more. After Ethereum, this is the protocol I find the most interesting. From the whitepaper: “The InterPlanetary File System (IPFS) is a peer-to-peer distributed file system that seeks to connect all computing devices with the same system of files. In some ways, IPFS is similar to the Web, but IPFS could be seen as a single BitTorrent swarm, exchanging objects within one Git repository. In other words, IPFS provides a high throughput content-addressed block storage model, with content-addressed hyper links. This forms a generalized Merkle DAG, a data structure upon which one can build versioned file systems, blockchains, and even a Permanent Web. IPFS combines a distributed hashtable, an incentivized block exchange, and a self-certifying namespace. IPFS has no single point of failure, and nodes do not need to trust each other.” Filecoin is the commercial, token project to lock IPFS into the crypto world.
Non-Fungible Tokens (NFTs): A unique digital asset (think about that!); A unit of data stored on a digital ledger (blockchain) that certifies a digital asset to be unique and therefore not interchangeable like almost everything else. NFTs can be used to represent items such as photos, videos, audio, text, and other types of digital files. Access to any copy of the original file, however, is not restricted to the buyer of the NFT currently (devs are working on solutions for this). While copies of these digital items are available for anyone to obtain, NFTs are tracked on blockchains to provide the owner with a proof of ownership that is separate from copyright. Most NFTs today live on the Ethereum chain as ERC-721 or ERC-1155 tokens (those are sub-protocols within the Ethereum chain).
Distributed Autonomous Organization (DAOs) and Maker DAO: An organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO’s financial transaction record and program rules are maintained on a blockchain. The precise legal status of this type of business organization is unclear, though in 2021 the state of Wyoming passed a law making DAOs a legal entity just like C-corps or LLCs (note that Wyoming was also the first state to create LLCs, in 1977). Most DAOs have been on Ethereum and Maker DAO is probably the largest and most prominent one (it’s a stabilized decentralized currency).
Polkadot: A network protocol that allows arbitrary data—not just tokens—to be transferred across blockchains. Hence it’s a true multi-chain application environment where things like cross-chain registries and cross-chain computation are possible. Polkadot can transfer this data across public, open, permissionless blockchains as well as private, permissioned blockchains. If the future is a lot of chains with layers on top, and many DAOs, Polkadot would be one of the connection layers for all of them, along with all sorts of other data. I have no idea if Polkadot succeeds, but I hope it does; it’s one of those rare, really ambitious tech companies, like an early Netscape or Google.
Chainlink: A decentralized oracle network provides reliable, tamper-proof inputs and outputs for complex smart contracts on any blockchain. Using this, you can establish “facts” in a more secure way to build a lottery or insurance company, repay a loan on an event happening, and basically connect any verified data anywhere in the world to a smart contract on a chain. You could also create a global series of events with lots of metadata (e.g. “Sensor #36, model #498 by Accuride Corp, on Lakeshore Dr. in Chicago, at Latitude: 41.8799 Longitude: -87.6173 on the side of the Vons building, placed 7″ above ground recorded a temperature of 34 degrees Celcius on July 4th, 2022 at 9:14:35PM”). These facts can be used for anything: write trusted news, settle commodity futures, calibrate indoor heating systems, etc.
Uniswap: A decentralized exchange with a novel “automated market maker” to efficiently swap any one token for another: think of it as an automated foreign exchange market fo the crypto world. It’s a Decentralized Trading Protocol with guaranteed liquidity for millions of users and hundreds of Ethereum applications.
Augur: A global, no-limit betting platform to let anyone, anywhere, bet how much they want on sports, economics, world events and more.
Celo: A global payments infrastructure built for mobile where thousands of organizations and individuals are developing, growing, and governing Celo, an open-source platform that enables anyone to build borderless applications
Solana: A fast, secure, and censorship resistant blockchain providing the open infrastructure required for global adoption. It has 400ms blocktimes and sub-second finality (much better than most chains). Apps don’t have to ever deal with sharding or layer 2, which ensures composability between ecosystem projects by maintaining a single global state as the network scales.
Who will win in this space? I have no idea and just listed some projects; you can watch Balaji below to understand the space and get more ideas. One of the best likely indicators of future success is where developers are going. Note that most crypto devs are independently wealthy and so work because they believe in and want to build decentralized tech – not for money. Traditional fintech companies find it nearly impossible to hire crypto devs and the older financial companies of JP Morgan, Capital One, GS, and more can’t get them at all.
Decentralized finance (DeFi)
There is a new global financial system evolving from the bones of Bitcoin and Ethereum. It continued with MakerDAO, stablecoins, and now saving/lending projects and decentralized exchanges like Compound, Yearn, and Uniswap/Sushiswap. These are already multi-billion dollar apps with tens of billions of dollars of weekly transactions. They make even the new fintech world of Paypal, Robinhood, and Coinbase seem old and quaint. This paper from the St. Louis Fed is probably the best introduction to DeFi.
APPENDIX: Crypto materials (For further reading and research)
Andreesen Crypto Intro – Oral Essay
Chris Dixon: Crypto Networks and Why They Matter
Bryan Armstrong on Conversations with Tyler
Nick Szabo on Tim Ferris
Vitalik on Tim Ferris
Katie Haun on Tim Ferris (early BTC use case – black market)
Balaji on Crypto and the World on Tim Ferris
Balaji on Crypto Applications (A16Z Crypto School)
Digital Gold (book by Popper of NYT) | Rebel Code: Linux And The Open Source Revolution
Why Buy Bitcoin (book by Edstrom) | Designing an Internet
Beyond this, there are a lot of great whitepapers to read (Bitcoin, Ethereum, Filecoin, IPFS, Cosmos, Polkadot, etc). The Solidity tutorial (it’s the main programming language of Ethereum) is also a good starting place. And below are the results from an informal survey of Coinbase employees on the tokens/projects they find the most interesting, after the 2021 Coinbase IPO.