Audio of the conversation is available on SoundCloud and iTunes.
Neha has been working as a member of the DCI for awhile now, but in this new role, she will drive the technical research agenda of the DCI and help coordinate research inside of MIT as well as in other academic institutions and in the broader community. She comes with a solid technical background with a PhD from MIT in distributed systems and previously as a software engineer at Google. Neha and the DCI have already been actively engaged in research, development and teaching in digital currencies, blockchain and related fields, but with Neha's leadership, I'm hoping that we can continue to ramp these efforts up as well as increase collaboration and engagement.
Neha lead the creation of a website for the DCI where you can learn about some of the projects and people involved. Also, as I wrote in a Medium post on September 6, Brian Forde, the director of the DCI will be transitioning out of that role.
Photo by Martin Thomas via Flickr - CC-BY
In 2015, I wrote a blog post about how I thought that Bitcoin was similar in many ways to the Internet. The metaphor that I used was that Bitcoin was like email - the first killer app - and that the Bitcoin Blockchain was like The Internet - the infrastructure that was deployed to support it but that could be used for so many other things. I suggested that The Blockchain was to finance and law what the Internet was to media and advertising.
I still believe it is true, but the industry is out over its skis. Over a billion dollars have been invested in Bitcoin and Fintech startups, tracking and exceeding investment in Internet investments in 1996. Looking at many of the businesses, they look like startups during that period, but instead of pets.com, we have blockchain for X. I don't think today's blockchain is the Internet in 1996 - it's probably more like the Internet in 1990 or the late 80's - we haven't agreed on the IP protocol and there is no Cisco or PSINet. Many of the application layer companies are building on an infrastructure that isn't ready from a stability or a scalability perspective and they are either bad idea or good idea too early. Also, very few people actually understand the necessary combination of cryptography, security, finance and computer science to design these systems. Those that do are part of a very small community and there are not enough to go around to support the $1bn castle we are building on this immature infrastructure. Lastly, unlike content on the Internet, the assets that the blockchain will be moving around and the irreversibility of many of the elements do not lend the blockchain to the same level agile software development - throw stuff out and see what sticks - that we can do for web apps and services.
There are startups and academics working on these basic layers, but I wish there were more. I have a feeling that we might be in a bit of a bubble and that bubble might pop or have a correction, but in the long run, hopefully we'll figure out the infrastructure and will be able to build something decentralized and open. Maybe a bubble pop will get rid of some of the noise from the system and let us focus like the first dot-com bust did for the Internet. On the other hand, we could end up with a crappy architecture and a bunch of fintech apps that don't really do much more than make existing things more efficient. We are at an important moment where decisions will be made about whether everyone will trust a truly decentralized system and where irresponsible deployments could scare people away. I think that as a community we need to increase our collaboration and diligently eliminate bugs and bad designs without slowing down innovation and research.
Instead of building apps, we need to be building the infrastructure. It's unclear whether we will end up with some version of Bitcoin becoming "The Internet" or whether some other project like Ethereum becomes the single standard. It's also possible that we end up with a variety of different systems that somehow interoperate. The worst case would be that we focus so much on the applications that we ignore the infrastructure, miss out on the opportunity to build a truly decentralized system, and end up with a system that resembles mobile Internet instead of wired Internet - one controlled by monopolies that charge you by the megabyte and have impossibly expensive roaming fees versus the flat fee and reasonable cost of wired Internet in most places.
There are many pieces to the infrastructure that need to be designed and tested. There are many ideas for different consensus protocols - the way in which a particular blockchain makes their public ledger tamper proof and secure. Then there are arguments about how much scriptability should be built into the blockchain itself versus on a layer above it - there are good arguments on either side of the argument. There is also the issue of privacy and anonymity versus identity and regulatory controls.
It looks like the Bitcoin Core developer team is making headway on Segregated Witness which should address many concerns including some of the scaling issues that people have had. On the other hand, it looks like Ethereum which has less history but a powerful and easier to use scripting / programing system is getting a lot of traction and interest from people trying to design new uses for the blockchain. Other projects like Hyperledger are designing their own blockchain systems as well as code that is blockchain agnostic.
The Internet works because we have clear layers of open standards. TCP/IP, for instance, won over ATM - a competing standard in some ways - because it turned out that the end-to-end principle where the core of the network was super-simple and "dumb" allowed the edges of the network to be very innovative. It took awhile for the battle between the standards to play out to the point where TCP/IP was the clear winner. A lot of investment in ATM driven technology ended up being wasted. The problem with the blockchain is that we don't even know where the layers should be and how we will manage the process of agreeing on the standards.
The (Ethereum) Decentralized Autonomous Organization project or "The DAO" is one of the more concerning projects I see right now.* The idea is to create "entities" that are written in code on Ethereum. These entities can sell units similar to shares in a company and invest and spend the money and operate much like a fund or a corporation. Investors would look at the code and determine whether they thought the entity made sense and they would buy tokens hoping for a return. This sounds like something from a science fiction novel and we all dreamed about these sorts of things when, as cypherpunks in the early 90's, we dared to dream on mailing lists and hacker meetups. The problem is, The DAO has attracted over $150M in investors and is "real," but is built on top of Ethereum which hasn't been tested as much as Bitcoin and is still working out its consensus protocol even considering a completely new consensus protocol for their next version.
It appears that The DAO hasn't been fully described legally and may expose its investors to liabilities as partners in a partnership. Unlike contracts written by lawyers in English, if you screw up the code of a DAO, it's unclear how you could change it easily. Courts can deal with mistakes in contract language by trying to determine the intent, but in code enforced by distributed consensus rules, there is no such mechanism. Also, code can be attacked by malicious code and there is a risk that a bug could create vulnerabilities. Recently, Dino Mark, Vlad Zamfir, and Emin Gün Sirer - key developers and researchers - published "A Call for a Temporary Moratorium on The DAO" describing vulnerabilities in The DAO. I fear that The DAO also raises the red flags for a variety of regulators that we probably don't want at the table right now. The DAO could be the Mt. Gox for Ethereum - a project whose failure may cause many people to lose their money and cause the public and regulators to try to slam the brakes on blockchain development.
Regardless of whether I rain on the parade, I'm sure that startups and investors in this space will continue to barrel forward, but I believe that as many of us as possible should focus on the infrastructure and the opportunities at the lowest layers of this stack we are trying to build. I think that getting the consensus protocol right, trying to figure out how to keep things decentralized, how to deal with the privacy issues without causing over-regulation, how we might completely reinvent the nature of money and accounting - these are the things that are exciting and important to me.
I believe there are some exciting areas for businesses to begin working and exploring practical applications - securitization of things that currently have a market failure such as solar panels in developing countries, or applications where there are standardized systems because of the lack of trust creates a very inefficient market such as trade finance.
Central banks and governments have begun to exploring innovations as well. The Singapore government is considering issuing government bonds on a blockchain. Some papers have imagined central banks taking deposits and issuing digital cash directly to individuals. Some regulators have begun to plan sandboxes to allow people to innovate and test ideas in regulatory safety zones. It is ironically possible that some of the more interesting innovations may come from experiments by governments despite the initial design of Bitcoin having been to avoid governments. Having said that, it's quite likely that governments will be more likely to hinder rather than help the development of a robust decentralized architecture.
* Just a few days after this post, The DAO was "attacked" as I feared. Here's an interesting post by the alleged "attacker". Reddit quickly determined that the signature in that post wasn't valid. And another post by the alleged attacker that they're bribing the miners not to fork. Whether these are actually the attacker or epic trolls, very interesting arguments.
Accounting underlies finance, business, and enables the levying of taxes for raising armies, building cities, and managing resources at scale. In fact, it is the way that the world keeps track of almost everything of value.
Accounting predates money, and was originally used by ancient communities to track and manage their limited resources. There are accounting records from Mesopotamia dating back more than 7,000 years, listing the exchange of goods. Over time, accounting became the language and information infrastructure for trade. Accounting and auditing enabled the creation of vast empires, such as those built by the Egyptians and the Romans.
As accounting scaled, it made sense to go from counting sheep, bushels of grain, and cords of wood, to calculating and managing resources using their exchange value in terms of an abstract unit: money. In addition to exchange, money allowed for recording and managing obligations. So where earlier bookkeeping just kept records of promises and exchanges between individuals (Alice lent Bob a goat on this date), money opened up a new realm of accounting by dramatically simplifying the management of accounts and allowing markets, companies, and governments to scale. However, through the centuries, this once powerful simplification has a resulted in a surprising downside-a downside made worse in today's digitally connected world.
While companies today use enterprise resource planning (ERP) systems to keep track of widgets, contractual obligations, and employees, the accounting system-and the laws that support it-require us to convert just about everything into monetary value, and enter it into a ledger system based on the 700-year-old double-entry bookkeeping method. This is the very same system used by the Florentine merchants of the 13th century and described by Luca Pacioli, the "father of accounting," in his book Summa de Arithmetica, Geometria, Proportioni et Proportionalità, published 1494.
When you take, for instance, a contract that pays out $1 million if it rains tomorrow, and put it into your accounts, you will be required to guess the chance of rain-maybe 50 percent-and value that asset at something like $500,000. The contract will actually never pay out $500,000; in the end, it will either be worth zero (no rain) or $1 million (rain). But if you were forced to trade it today, you'd probably sell it for something close to $500,000; so for tax and management purposes, you "value" the contract at $500,000. On the other hand, if you are unable to sell it because there are no buyers, it might actually be valued at zero today by regulators interested in liquidity, but then suddenly valued at $1 million tomorrow if it rains.
Basically, a company's accounts are an aggregate of cells in various ledgers with numbers that represent a numerical value denominated in some currency-yen, dollars, euros, etc.-and those numbers are added up and organized into both a balance sheet and an income statement that show the health of the company to management and investors. They are also used to calculate profits and the amount of tax owed to governments. This balance sheet is a list of assets and liabilities. If you looked in the assets column, you'd have a number of items that you would be reporting as having value, including things like printing presses, lines of code, intellectual property, obligations from people who may or may not pay you in the future, cash in various countries' currencies, and best guesses on things like the future prices of a commodity or the value of another company.
As an auditor, investor, or trading partner, you might want to drill down and try to test the assumptions that the company is making and see what would happen if those were incorrect at the time they were recorded, or turned out to be wrong sometime in the future. You might also want to understand how buying another company would change your own company based on the way your obligations and bets interacted with theirs. You could rack up millions of dollars in auditor fees to "get to the bottom" of any number of assumptions. The process would involve manually reviewing the legal contracts, and also the assumptions made in every cell of every spreadsheet. That's because standard accounting is a very "lossy" process that reduces complex and context-dependant functions and transforms them into static numbers at every step. The underlying information is somewhere, but only exposed with a lot of manual digging.
The modern complex financial system is full of companies that have figured out ways to guess when investors and the companies themselves have made mistakes in their assumptions. These companies bet against a company with inaccurate pricing or take advantage of the gap in information to convert this into financial returns for themselves. When these mistakes are duplicated across the system, it can cause fluctuation amplification that also allows companies to make more money both as markets rise, as well as fall, if they can successfully predict those fluctuations. In fact, as long as the whole system doesn't collapse, smart traders make more money on fluctuation than on stability.
Just like rodent exterminators aren't excited about the idea of rodents being completely eliminated because they would no longer have jobs, those financial institutions that make money by "making the system more efficient and eliminating waste" don't really want a stable system that isn't wasteful.
Right now, the technology of the financial system is built on top of a way of thinking about money and value that was designed back when all we had were pen and paper, and when reducing the complexity of the web of dependencies and obligations was the only way to make the system functionally efficient. The way we reduce complexity is to use a common method of pricing, put elements into categories, and add them up. This just builds on 700-year-old building blocks, trying to make the system "better" by doing very sophisticated analysis of the patterns and information without addressing the underlying problem of a lossy and oversimplified view of the world: a view where everything of "value" should be as quickly as possible recorded as a number.
The standard idea of the "value" of things is a reductionist view of the world that is useful to scale the trading of commodities that are roughly of equal worth to a large set of people. But, in fact, most things have very different values to different people at different times, and I would argue that much-if not most-things of value can't and probably shouldn't be reduced to numbers on a spreadsheet. Financial "value" has a very specific meaning. A home clearly has "value" because someone can live in it and it's useful. However, if no one wants to buy it and no one is buying similar homes on the market, you can't set a price for it; it is illiquid and it is impossible to determine its "fair market value." Some contracts and financial instruments are nonnegotiable, may not have a "fair market value," and may even have no value to you if you needed money (or an apple) RIGHT NOW. Part of the confusion comes from the difficulty of describing legal and mathematical ideas in plain English, and the role of context and timing.
One example is exchange rates. My wife moved to Boston from Japan several years ago, but still converts prices into yen. She sometimes comments on how expensive something has gotten because the value of the yen has diminished. Because most of our earnings and spending are in dollars, I always have to remind her, the "value" in yen is irrelevant to her now, although not irrelevant to her mother, who is in Japan.
We have become accustomed to the notion that things have a "price," and that "price" is equivalent to its "value." But an email from you to me about a feeling that you had about our last conversation is probably valuable to me at a particular time and probably not valuable to most people. A single apple is worth a lot more to a hungry person than the owner of an apple orchard. Context is everything.
"Can't Buy Me Love" - The Beatles
The economics notion of consumers making financial decisions to maximize "utility" as a kind of proxy for happiness is another example of how the notion of a universal system of "value" oversimplifies its complexity-so much so that the models that assume that humans are "economically rational" actors in a marketplace simply don't work. The simplest version of this model would mean that the more money you had, the happier you would be, which Daniel Kahneman and Angus Deaton argue is true up to about $75,000 a year in annual income.[1]
Today, we have the technology and the computational power to create a system of accounts that could retain and deal with a lot of the complexity that the current system was designed to avoid. There is, for example, no reason that every entry in our books needs to be a number. Each cell could be an algorithmic representation of the obligations and dependencies that it represents. In fact, using machine learning, accounts could become sophisticated probabilistic models for what might happen depending on how things around them change. This would mean that the "value" of any system would change depending on who was asking, their location, and the time parameters.
Today, when a bank regulator conducts a stress test, it gives a bank a scenario-changes in the credit markets or the prices of certain things. The bank is then required to return a report on whether it would crash or remain solvent. This requires a lot of human labor to go through the accounts and run simulations. But what if the accounts were all algorithmic, and instead you could instantly run a program to provide the answer to the question? What if you had a learning model that could answer a more important question: "What sets of changes to the market WOULD make it crash, and why?" That's really what we want to know. We want to know this not just for one bank, but the whole system of banks, investors, and everything that interacts.
When I'm buying something from a company-let's say a credit default swap from your company, AIG-what I would want to know is whether, when the day comes to pay the obligation, in the unlikely chance that the AA mortgage-backed bonds that I was betting against defaulted, would your company be able to pay? Right now, there is no easy way to do this. However, what if all of the obligations and contracts, instead of being written on paper and recorded as numbers, were actually computable and "visible"? You'd immediately be able to see that, in fact, in the scenario in which you'd have to pay me, you'd actually have no money since you'd written similar contracts to so many people that you'd be broke. Right now, even the banks themselves can't see this unless an internal investigator thinks to look for this ahead of time.
With cutting edge cryptography like zero-knowledge proofs and secure multiparty computation, there are ways we might be able to keep these accounts open to each other without compromising business and personal privacy. While computing every contract as a cell in a huge set of accounts, every time anyone asked a question it would exceed even today's computing capacity. But with machine learning and the creation of models, we might be able to dampen, if not stabilize, the massive amplifications of fluctuations. These bubbles and collapses occur today, in part, because we are building our whole system on an oversimplified house of cards, with the handlers having an incentive to make them fragile and opaque in order to introduce inefficiencies they can exploit later to make money for themselves.
I think the current excitement about Bitcoin and distributed ledgers has created a great opportunity to take advantage of its flexible and reprogrammable nature, allowing us to rethink the fundamental system of accounts. I'm much more interested in this than in apps for banks, or even new ideas in finance, which will address some of the symptoms without taking a shot at eliminating one of the root causes of the impossibly complex and outdated system that we've built on a 700 year old double-entry bookkeeping method-the very same system used by the Florentine merchants of the 13th century. It feels like we are using integers when we should be using imaginary numbers. Reinventing accounting should be more like discovering a new number theory than tweaking the algorithms, which is what I feel like we've been doing for the last several hundred years.
--
Originally posted on PubPub.ito.com. Please read and post comments there.
[1]Daniel Kahneman and Angus Deaton. "High Income Improves Evaluation of Life But Not Emotional Well-Being". Proceedings of the National Academy of Sciences. (2010).
In a previous post, I wrote that I believe the Blockchain has the potential to be as disruptive -- and unlock as much opportunity and innovation -- as the Internet and that it could become a ubiquitous, interoperable, reliable, low-cost network for transactions of various kinds. But along with that enormous potential, the Blockchain also faces challenges that are similar to, but in many ways very different from what we had and continue to have with the Internet and the Open Web.
I'm worried about the current situation of Bitcoin and the Blockchain.
Partially driven by the overinvestment in the space, and partially by the fact that Bitcoin is much more about money than the Internet ever was, it is experiencing a crisis that didn't really have any parallels in the early days of the Internet. Nonetheless, the formation of the Internet offers some important lessons -- most importantly, on the question of the talent and knowledge pool. In those early days, and at some layers maybe even still today, there were only a very small number of people who had the background, brain type and personality to understand some of the core elements that made the Internet work. I remember when there were only a handful of people in the world who really understood Border Gateway Protocol (BGP) and we had to hunt them down and share them with our "competitors" when we were setting up PSINet in Japan.
It's very similar today with Bitcoin and the Blockchain. There are a small number of people who understand cryptography, systems, networks and code and are capable of understanding the Bitcoin software code. Most of them are working on Bitcoin, while some are working on Ethereum and other "related" systems and a few more are scattered around the world in other places. It's a community including some who have been around since the 90s, before the Web, going to crazy conferences like the Financial Cryptography conference. Like any free and open-source software community on the Internet, it's a bunch of people who know each other and mostly, though not always, respect each other, but which fundamentally holds a near monopoly on talent.
Unfortunately, the wild growth of Bitcoin and now "the Blockchain" has caught this community off guard from a governance perspective, leaving the core developers of Bitcoin unable to interface effectively with the commercial interests whose businesses depend on scaling the technology. When asked "can you scale this?" They said, "we'll do the best we can." That wasn't good enough for many, especially those who don't understand the architecture or the nature of what is going on inside of Bitcoin.
Many companies that are used to making decisions around less complicated systems -- like building a website or buying and running Enterprise Resource Planning systems -- felt they could either just hire other engineers who would listen to the customer needs better or became so annoyed with the, "we can't promise but we'll try" attitude of the core developers that they lowered their standards and went with whomever would promise to meet their demands.
The future of Bitcoin, decentralized ledgers and other Blockchain-like projects depends on this community. Many people call them "Bitcoin Core" as if they are some sort of company you can fire or a random set of developers with skills that you can just train others to acquire. They're not. They're more like artists, scientists and precision engineers who have built a shared culture and language. To look for another group of people to do what they do would be like asking web designers to launch a space shuttle. You can't FIRE a community and, statistically speaking, the people working on the Bitcoin ARE the community.
If you try to build "something like Bitcoin but better!" it will probably turn out insecure, underwhelming, and will go against the the fundamental principles that give Bitcoin the potential to be as impactful to banking, law and society as the Internet has been to media, communication, and commerce.
Bitcoin is an open project, with a sometimes-inefficient-but-open community process that always pushes for the fundamentals of decentralization, robustness, and innovation. But Bitcoin isn't a single installation, it's a living, working system that presents a $6.5Bn bounty for anyone who can break it. This high valuation causes a great deal of caution and testing before anything is deployed on its network, but we can be quite sure that many many people have been thinking about how they can break the system and have so far failed.
Ethereum and Ripple are probably the two next largest networks in the $100's of millions range (Etherium is currently $400M+) - Ripple with a fundamentally different consensus protocol and Ethereum with interesting and useful features. If you can't do certain transactions or develop certain application on Bitcoin, I can see why Ripple or Ethereum might be interesting. If you're serious about security and stability -- and you should be -- Bitcoin is almost the only choice with the largest bounty, and largest community, with the most practical modern experience deploying to a broad and active network in the real world.
Many people who are so excited about the potential applications that they have ignored completely the architecture of the system on which they would run. Just as many Internet companies assume that the Internet works on its own, they assume that all blockchains are the same and work, but blockchain technology is not as mature as the Internet where you can almost get away with that. They often view the people working on Bitcoin as a bunch of crazy Libertarians who came up with a cool idea but believe that a bunch of hired guns could put the same thing together given enough money. Governments and banks are launching all kind of plans without enough thought going into how they're actually going to build the secure ledger.
I fear that we'll build something that at the application layer looks like what Bitcoin and the Blockchain promised, but under the hood is just the same old transaction system with no interoperability, no distributed system, no trustless networks, no extensibility, no open innovation, nothing except maybe a bit of efficiency increased from new technology.
We have a good example of that. One of the key benefits of the Internet was that the open protocols allowed innovation and competition at EVERY layer with each layer properly sandwiched between standards developed by the community. This drove costs down and innovation up. By the time we got around to building the mobile web, we lost sight (or control) of our principles and let the mobile operators build the network. That's why on the fixed-line Internet you don't worry about data costs, but when you travel over a national border, a "normal" Internet experience on mobile will probably cost more than your rent. Mobile Internet "feels" like the Internet, but it's an ugly and distorted copy of it with monopoly-like systems at many layers. This is exactly what happens when we let the application layer drag the architecture along in a kludgy and unprincipled way.
Lastly, but most importantly, we're burning out those developers who we most need to be focused on the code and the architecture. Many are dropping out or threatening to drop out. Many are completely discouraged and depleted by the public debate. Even if you believe that we will eventually have a new generation of financial cryptographers, you can't train them without this community. We have many smart people on all sides of this debate and I think that most of them are doing what they are doing with good intentions. However, those of us on the sidelines fanning the flames, making uninformed and provocative statements and fundamentally disrespecting and undervaluing the contribution of the Bitcoin community to the past, present and future of this possibly world-changing innovation, are doing harm.
I've been sitting back quietly hoping that things would just calm down, and they might eventually. But I see more and more misinformation and hype with "Blockchain" being reduced to the same useless suitcase words that "IoT" and "The Cloud" have become and it makes me sad and a bit mad.
I've decided to spend the next chunk of time trying to counteract or balance some of the most misguided stuff that I'm seeing in areas that will have an impact on our future. It feels like while the Bitcoin Core development community is robust, the ecosystem of stakeholders and the understanding of how decisions are made and information is shared is still fragile and vulnerable. I fear that the communication and now emotional rift between various key groups and individuals is wide right now, but I believe it's imperative that we try to bring the community together and focus on executing on a shared technical plan that represents our best shot at broad consensus from both a technical and a practical perspective. Hopefully, we can build a community and a process that is more robust and can handle the inevitable disagreements in the future in a less emotional and more technical and operational way.
As Bitcoin continues to gain momentum and capture the interest of entrepreneurs, hackers, businesses, policymakers, and academics, we have decided to launch an Initiative at the MIT Media Lab, with participation from faculty and students from across the Institute, focusing on Bitcoin and more generally cryptocurrencies.
The Initiative will explore vital research topics that our faculty and students will engage in with the support and participation of some Media Lab member companies. The students running the MIT Bitcoin Club, the MIT Bitcoin Project, and the various events including the Bitcoin Expo have been a key part of getting this initiative started. The MIT Bitcoin Expo, which was hosted by MIT Bitcoin Club President Jonathan Harvey-Buschel and Wellesley Bitcoin Club President Jinglan Wang this year exemplified the kind of interscholastic collaboration and excitement over Bitcoin research that we want to see going forward.
The Media Lab has hired former White House senior advisor for mobile and data innovation, Brian Forde to lead the overall effort along with MIT CSAIL's Nickolai Zeldovich, a highly distinguished professor in security and distributed systems, who will be coordinating the research and academics. Jeremy Rubin, an undergraduate who helped run the MIT Bitcoin Project, will coordinate communications with the broader developer community and MIT students and will also work on research projects. More details on other MIT participants can be found in Brian's blog post.
The Initiative's focus will be heavily informed by the work done by the Bitcoin community, as well as by companies and forward-thinking policy makers. We hope to be able to contribute academically and technically to the field, following the great example set by Princeton and others. This is more about rallying interest within the MIT community than forming a general long-term solution for Bitcoin development and governance.
As I've said in a previous blog post and my talk at the MIT Bitcoin Expo, I do think there is a real need for a coordinating function around standards and policy. I believe that this effort must be multinational and multistakeholder. Continuing discussion with the Berkman Center at Harvard, Stanford Center for Internet and Society, and Oxford University will, we hope, contribute to the broader conversation on this matter.
See the post by Brian on the Media Lab blog for more information about the Initiative. We've set up an IRC channel irc.freenode.net/#mit-dci, where we will be hanging out. We look forward to your feedback and ideas for collaboration.
In the post that follows I'm trying to develop what I see to be strong analogues to another crucial period/turning point in the history of technology, but like all such comparisons, the differences are as illuminating as the similarities. I'm still not sure how far I should be stretching the metaphors, but it feels like we might be able to learn a lot about the future of Bitcoin from the history of the Internet. This is my first post about Bitcoin and I'm really looking more for reactions and new ideas than trying to prove a point. Feedback and links to things I should read would be greatly appreciated.
I'm fundamentally an Internet person -- my real business life started around the dawn of the Internet and for most of my adult life, I've been involved in building layers and pieces of the Internet, from helping start the first commercial Internet service provider in Japan to investing in Twitter and helping bring it to Japan. I've also served on the boards of the Open Source Initiative, the Internet Corporation for Names and Numbers (ICANN), The Mozilla Foundation, Public Knowledge, Electronic Privacy Information Center (EPIC), and been the CEO of Creative Commons. Given my experiences in the early days of the net, it's possible that I'm biased and everything new looks like the Internet.
Having said that, I believe that there are many parallels between the Internet and Bitcoin and there are many lessons from the Internet that can help provide guidance in thinking about Bitcoin and its future, but there are also some important differences.
The similarity is that Bitcoin is a transportation infrastructure that is decentralized, efficient and based on an open protocol. Instead of transferring packets of data over a dynamic network in contrast to the circuits and leased lines that preceded the Internet, Bitcoin's protocol, the blockchain, allows trust to be established between mutually distrusting parties in an efficient and decentralized way. Although you could argue that the ledger is "centralized", it's created through mechanical decentralized consensus.
The Internet has a root -- in other words, just because you use the Internet Protocol doesn't mean that you're necessarily part of the Internet. To be part of THE Internet, you have to agree to the names and numbers protocol and root servers that are administered by ICANN and its consensus process. You can use the Internet Protocol and make your own network, using your own rules for names and numbers, but then you're just a network and not The Internet.
Similarly, you can use the blockchain protocol to create alternative bitcoins or alt.coins. This allows you to innovate and use many of the technological benefits of Bitcoin, but you are no longer technically interoperable with Bitcoin and do not benefit from the network effect or the trust that Bitcoin has.
Also like the beginning of the Internet, there are competing ideas at each of the levels. AOL created a dialup network and really helped to popularize email. It eventually dumped its dialup network, its core business, but survived as an Internet service. Many people still have AOL email accounts.
With crypto-currencies, there are coins that don't connect to the "genesis block" of Bitcoin -- alt.coins that use fundamentally the same technology. There are alt.coins that use slightly different protocols and some that are fundamentally different.
On top of the coin layer, there are various services such as wallets, exchanges, service providers with varying levels of vertical integration -- some agnostic to whichever cryptocurrency ends up "winning" and some tightly linked. There are technologies and services being built on top of the infrastructure that use the network for fundamentally different things than transacting units of value, just as voice over IP used the same network in a very different way.
In the early days of the Internet, most online services were a combination of dialup and x.25 a competing packet switching protocol developed by Comité Consultatif International Téléphonique et Télégraphique, (CCITT), the predecessor to the International Telecom Union (ITU), a standards body that hangs off of the United Nations. Many services like The Source or CompuServe used x.25 before they started offering their services over the Internet.
I believe the first killer app for the Internet was email. On most of the early online services, you could only send email to other people on the same service. When Internet email came to these services, suddenly you could send email to anyone. This was quite amazing and notably, email is still one of the most important applications on the Internet.
As the Internet proliferated, the TCP/IP stack, free software that anyone could download for free and install on their computer to connect it to the Internet, was further developed and deployed. This allowed applications that ran on your computer to use the Internet to talk to other programs running on other computers. This created the machine-to-machine network. It was no longer just about typing text into a terminal window. The file transfer protocol (FTP) and later Gopher, a text-based browsing and downloading service popular before the web was invented, allowed you to download music and images and create a world wide web of content. Eventually, permissionless innovation on top of this open architecture gave birth to the World Wide Web, Napster, Amazon, eBay, Google and Skype.
I remember twenty years ago, giving a talk to advertising agencies, media companies and banks explaining how important and disruptive the Internet would be. Back then, there were satellite photos of the earth and a webcam pointing at a coffee pot on the Internet. Most people didn't have the imagination to see how the Internet would fundamentally disrupt commerce and media, because Amazon, eBay and Google hadn't been invented -- just email and Usenet-news. No one in these big companies believed that they had to learn anything about the Internet or that the Internet would affect their business -- I mostly got blank stares or snores.
Similarly, I believe that Bitcoin is the first "killer app" of The Blockchain as email was the killer app for the beginning of the Internet. We are in the process of inventing eBay, Amazon and Google. My hunch is that The Blockchain will be to banking, law and accountancy as The Internet was to media, commerce and advertising. It will lower costs, disintermediate many layers of business and reduce friction. As we know, one person's friction is another person's revenue.
One of the main things we worked on when I was on the board of ICANN was trying to keep the Internet from forking. There were many organizations that didn't agree with ICANN's policies or didn't like the US's excessive influence over the Internet. Our job was to listen to everyone and create an inclusive and consensus-based process so that people felt that the benefits of the network effect outweighed the energy and cost of dealing with this process. In general we succeeded. It helped that almost all of the founders and key technical minds and technical standards organizations that designed and ran the Internet worked together with ICANN. This interface between the policy makers and the technologists -- however painful -- was viewed as something that wasn't great but worked better than any of the other alternatives.
One question is whether there is an ICANN equivalent needed for Bitcoin. Is Bitcoin email and The Blockchain TCP/IP?
One argument about why it might not be the same is that ICANN fundamentally had to deal with the centralization caused by the name space problem created by domain names. Domain names are essential for the way we think the Internet works and you need a standards body to deal with the conflicts. The solutions to Bitcoin's centralization problems will look nothing like a domain name system (DNS), because although there is currently centralization in the form of mining pools and core development, the protocol is fundamentally designed to need decentralization to function at all. You could argue that the Internet requires a degree of decentralization, but it has so far survived its relationship with ICANN.
One other important function that ICANN provides is a way to discuss changes to the core technology. It also coordinates the policy conversation between the various stakeholders: the technology people, the users, business and governments. The registrars and registries were the main stakeholders since they ran the "business" that feeds ICANN and provides a lot of the infrastructure together with the ISPs.
For Bitcoin it's the miners -- the people and companies that do the computation required to secure the network by producing the cryptographically secure blockchain at the core of Bitcoin -- all in exchange for bitcoin rewards from the network itself. Any technical changes that the developers want to make to Bitcoin will not be adopted unless the miners adopt them, and the developers and the miners have different incentives. It's possible that the miners have some similarities to the registrars and registries, but they are fundamentally different in that they are not customer-facing and don't really care what you think.
As with ICANN, the users do matter and are key for the network effect value of Bitcoin, but without the miners the engine doesn't run. The miners aren't as easy to identify as the registrars and registries and it's unclear how the dynamics of incentives for the miners will develop with the value of bitcoin fluctuating, the difficulty of mining increasing and the transaction fees being market driven. It's possible that they will develop into a community with a user interface and a governance function, but they are mostly hidden and independent for a variety of reasons that are unlikely to change for now. Having said that, one of the first publicly traded Bitcoin companies is a miner.
The core developers are different as well. The founders of the Internet may have been slightly hippy-like, but they were mostly government-funded and fairly government-friendly. Cutting a deal with the Department of Commerce seemed like a pretty good idea to them at the time.
The core Bitcoin developers are cypherpunks who do what they do because they don't trust governments or the global banking system and are trying to build a distributed and autonomous system, one that is impervious to regulation and meddling by anyone at any time. At some level, Bitcoin was designed to not care what regulators think. The miners have an economic interest in Bitcoin having value, since that's what they're paid in, and they care about scale and the network effect, but the miners probably don't care if it's Bitcoin or an alt.coin that ends up winning, as long as their investments in hardware and plant don't disappear before they make a return on their investment.
Regulators clearly have an incentive to influence the rules of the network, but it's unclear whether the core developers really need to care what the regulators think. Having said that, without some sort of buy-in by regulators, it's unlikely to scale or have the mainstream impact that the Internet did.
Very much like the early days of the Internet, when we saw the power of Internet email but hadn't yet invented the Web, we are just imagining the potential uses of concepts such as crypto-equity and smart contracts ... to name just a few.
I believe it's possible that over-regulation could cause Bitcoin or the blockchain to never achieve its full potential and remain a feature of the side-economy, much in the same way that the Tor anonymizing system is extremely valuable to people who really need privacy but not really used by "normal people"... yet.
What helped make the Internet successful was the lack of regulation and the generally inclusive and permissionless nature of innovation. This was driven in large part by free and open source software and the venture capital community. The question I have is whether the fact that we're now talking about "money" and not "content," and that we seem to be innovating at a much higher speed (venture capital investment in Bitcoin is outpacing early Internet investments), the dialog in popular media is growing, and governments are very interested in Bitcoin makes this a completely different game. I think ideas like the five-year moratorium on Bitcoin regulation proposed by US Representative Steve Stockman are a good idea. We really have no idea what this whole thing is going to turn into, so a focus on dialog versus regulation is key.
I also believe that layer unbundling and innovation at each layer, assuming that the other layers will sort themselves out, is a good idea. In other words, exchanges and wallets that are coin-agnostic or experiments with colored coins, side chains and other innovations that are "unbundled" as much as possible allow the learnings and the systems created to survive regardless of exactly how the architecture turns out.
It feels a lot to me like when we were arguing over ethernet and token ring -- for the average user, it doesn't really matter which we end up with as long as in the end it's all interoperable. What's different is that there is more at stake and it's moving really fast, so the shape of failure and the cost of failure might be much more severe than when we were trying to figure out the Internet and a lot more people are watching.
![Joi Ito [logo]](/_site/img/joi-ito-logo-300.png){kind=logo}
