Governance – The Future

“Governance comprises all of the processes of governing – whether undertaken by the government of a state, by a market or by a network – over a social system (family, tribe, formal or informal organization, a territory or across territories) and whether through the laws, norms, power or language of an organized society. ….” –

Technology changes everything… and you can’t stop it.  

Technology is mostly good yet sometimes bad but you can’t stop progress. Technology enables better health outcomes, it allows people to be more informed and better educated, it allows for easier and more affordable communication, it allows for automation and productivity increases… (the list is long) but just as important technology can produce negative unexpected outcomes. 

Technology’s unexpected negative outcomes in the past had less potential to harm society than what is upon us today and in the near future. In the past technology disintermediated companies… In the future, technology has the opportunity to disintermediate society-hence, GOVERNANCE IS THE FUTURE <<–hint, hint, entrepreneurs there is a business opportunity here.

Governance – The Past

Up to today, governance frameworks that have had an impact on how technology is used have mostly been left up to industry groups with some government oversight and mostly due to data security concerns (PCI-DSS, HIPAA, NERC, FISMA etc..) but now countries are mandating good governance as well (GDPR being one example) primarily due to privacy.  Farther down in the technology stack there are many governance organization – you can find that lineage here for the Internet as an example. However, there is little from these past frameworks that can prepare us for the future and unfortunately, our governing body (US Congress) is ill-prepared for the job but I do think we will be OK because of the governance vacuum will create an opportunity for entrepreneurs to fill.

Something Fundamentally Changed – Every Company Is Now A Technology Company

Up to now, technology has been thought of as an enabler of productivity… a driver of capitalism… but unfortunately, many companies still believe their IT team is responsible for technology.  Many still believe their executives need to understand technology but it’s their IT teams job to enable it and Securities job to lock it down… they still believe their exec’s jobs are revenue & profit (selling more widgets, increasing the margin of the widgets they sell and finding new widgets to sell) … but something fundamentally changed–Every company is now a tech company (here) (here) (here) – Disintermediation due to technology hasn’t (and will not) stop.  The power of data required good CEO’s to turn their companies into technology companies–but ready for this: now you may become irrelevant because of what you do… or how you are structured to perform what you do…

Artificial Intelligence/Machine Learning/Robotics is here now and will drive a wrecking ball through some major job categories. Blockchain-Cryptocurrency economics’ will change how companies are built and how value moves between entities. CRISPR-CAS9 will produce incredible healthcare outcomes and quantum computing presents unimagined breakthroughs.  These technologies are more powerful than anything society has ever witnessed.  

  • How CRISPR-Cas9 will change the world (here).
  • How Artificial Intelligence will change the world (here).
  • How Blockchain-Cryptocurrency will change the world (here). Corp structure (here).

Governance – The Future

“The real problem of humanity: we have paleolithic emotions; medieval institutions; and god-like technology… and it is terrifically dangerous, and it is now approaching a point of crisis overall.” – E. O. Wilson

Governance in healthcare is more straight-forward (although poorly executed many times in the US). The impact on healthcare in general from CRISPR-Cas9 is already being examined and regulated across the world. (here) (here) (here) (here) (here) (here).  However, some countries may be getting out ahead and teaching the rest of society about the need for a global view of governance in regards to gene editing.

The governance of Artificial Intelligence has been more challenging as there is not a great framework to call upon. (here) (here). AI as it relates to justice, data quality and autonomy involve identifying answers to questions surrounding the safety of AI, what legal and institutional structures need to be involved, control and access to personal data, and what role moral and ethical intuitions play when interacting with AI. When a citizen’s life can be shaped by algorithms who is in control of monitoring those that created the algorithms and the outcomes of such algorithms? In the past, we’ve seen machine learning racially profile bias, unfairly deny individuals for loans, and incorrectly identify basic information about users. The development of AI governance will help determine how best to handle scenarios where AI-based decisions are unjust or contradict human rights.

Cryptocurrency was born out of anarchistic libertarianism but fundamentally has the opportunity to re-shape how companies are built in the future, how securities are traded and how money moves. It is now a question of ‘when’ versus ‘if’ given the worldwide momentum of Bitcoin, Ethereum, XRP, EOS, and others (including layer 2 solutions and DApps). No, I’m not referring to SEC regulation–I’m referring to how governance frameworks play out for different levels of the stack (some examples are mapped out in this paper). However, as this progress shakes out governance will be the key to ensuring we manage the disintermediation in a way that doesn’t wreck economies.

‘The problem is that currency and capital respond differently to economic growth. Capital appreciates with economic growth and currency depreciates with economic growth as an economy grows.  Inflation is commonly thought of as the printing of new money but really it increases in prices over time as a result of economic growth. Capital as an asset type appreciates as the economy grows and is more scarce than currency.  We print more currency to keep up with inflation to ensure stable prices hence it depreciates with economic growth over time. What happens over time is that capital becomes more concentrated and we have a lot of people living their lives in currency and only a few living their lives in capital.   In crypto if we combine these into a single asset (Bitcoin) we don’t get the same income inequality or wealth inequality however by separating the access token (work token) from the currency token we risk the people who acquired the asset tokens early on may become concentrated over time as the economy grows.‘ – great A16z podcast on the subject

More notes to come…

How do new blockchain/crypto business model incentives differ from old school companies like Facebook?

I recently read Chris Dixon’s article at WIRED titled “BLOCKCHAIN CAN WREST THE INTERNET FROM CORPORATIONS’ GRASP” found here

The article was a fun read but it was very high level and left me with questions about how the incentives for founders, investors, customers, and the employees change in this new world (i.e. when governance is provided by the community versus the company). For example, if you compare the company Facebook to a NewCo like a steemit.

I listed my assumptions in the table below after reading the article. It would be great for this community to help contrast the changes between models (I also posted this article on steemit and I’m spending some time learning the platform as well as the new crypto/blockchain models that have momentum).

Please comment on what is right/wrong or needs to be better articulated in the table below…

Facebook (Governance provided by the Company) NewCo’s (Governance provided by the Community)
Founders invest time and $ upfront and are rewarded by pay in $ and exit (sale or IPO) in $ of shares they own Founders invest time and $ upfront and are rewarded by pay in $ from ICO/STO and from an increase in the token price of held back tokens which are eventually sold for $

Note: Founders hold back tokens that they personally own that are valued and can be sold on an exchange for $ once vested

Change= Founders can sell tokens for $ once tokens vest versus at exit or IPO

Risk: From day 1 the company is public which comes with a great deal of overhead; Founders can also cash out once vested.

Investors buy shares or debt in company in series A, B, C etc for $ and get rewarded by increased share price (over time) which in turn is sold for $ upon exit Investors buy tokens (example: STEEM, SP or SBD) in company at any time for $ and get rewarded by increased token price or interest on debt (ex:SBD)which in turn is sold for $

Change = Investors buy tokens at any time versus shares in the company

Company provides proprietary service at no-cost and sells advertising and get rewarded with $Change = Company gives proprietary service away for free versus an old school MSFT model where proprietary software is sold for $ Company provides open-source service at no-cost and sell nothing and get no reward (other than token appreciation in the market)

Note: Company holds back tokens from market to be sold for $ and used to run company

Change = Company sells nothing

Change = Company reward is 0

Employees help company make proprietary service; sell advertising and get rewarded with $ Employees help make & sell open-source service and get rewarded with pay ($ from held back tokens); Community helps company make open-source service and gets rewarded with tokens which can be sold for $

Change=Community helps develop open-source code

Customers get proprietary service and pay with their data and get rewarded with value Customers get open-source service and pay with activity and get rewarded with value and tokens which they can sell for $

What others report:

> From TechCrunch: Tokens (versus options) can better incentivize startup employees than equity “One of the largest differences between tokens and equity is that tokens are immediately liquid, assuming that they have already been listed on an exchange.”–however, as commenters to the article point out easy liquidity for employees can be bad for a startup. It can also cause tax issues for the employees.

> From CoinDesk: The Biggest Problem for ICOs? In 2018, It Was Their Own Investors” Instead of treating individuals who make early contributions as merely financial investors, projects that are truly pursuing decentralization should recognize them as more akin to employees who receive stock options (and can actively contribute to the network from outside the organization) and adopt a philosophy of ‘compensation through the protocol’ to leverage them.” — ‘Proof of Contribution’

Blockchain: A lot of money, momentum and hope… but what is real?

This ‘note’ is to help me (as a long-term investor & entrepreneur considering an investment of time and other-peoples-money) know what variables to consider before moving forward with a blockchain &/or cryptocurrency project.

<These notes assume you understand Bitcoin, Public/Private & Permissioned/Permissionless & federated blockchains, consensus concepts, side chains, ICO/STO, stable-coins, utility/app-payment/security tokens and smart contracts.  If you don’t please review the following notes.>

I’m sure we will look back on this time and ask how we got here… History may likely unfold something like the following:

  • 2010: Bitcoin engendered the anti-establishment types
  • 2012: Bitcoin’s growth engendered the speculators
  • 2013: Bitcoin’s blockchain technology and opportunity caught the eye of the Silicon Valley entrepreneurs (‘can we build a better cryptocurrency’ and ‘what else can we do with blockchain’)
  • 2014: Marketers and VCs saw the opportunity then smart money became interested
  • 2018: Smart money gets in
  • 2018: Everyone is talking about “Blockchain” regardless if they understand it or not
  • 2019: The market went boom and the bubble burst
  • 2020: Startup-survivors, corporation and governments began to use the technology for huge productivity gains

…but who will survive and why?  What variables do we need to keep an eye on to ensure we are not a casualty of an impending market disruption.

Variable 1: Trust: Bitcoin engendered the anti-establishment types

Nakamoto’s Bitcoin whitepaper pushed on a major anti-establishment hot button by pointing out that Bitcoin operates outside of government control: “The root problem with conventional currency is all the trust that is required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust”.

Other’s hope that the underlying technology ‘Blockchain’ will allow for any transaction or data transfer to be completed through peer-to-peer computer networks, with no need for third parties like Central Banks, Amazon, Facebook or Google (see more here). Early on, it attracted those who distrust established authority.

However, it’s not just fringe anarchists any more… Citizens across the globe are losing trust in government, media, and businesses.   Just take a look at Edelman’s latest Global Trust report.

It could be the perfect time for a bit more flattening of our world by software…  Trust in the institution is a variable to keep an eye on – as it is at the heart of what drives blockchains success.

Variable 2: The amount of money speculators are investing in the market

From a cryptocurrency market cap perspective, we are talking about billions of dollars. See here.

…but we are still nowhere near the size of the problem we had in 2000-2002 (Dotcom bubble).  More here. However, the speculators continue to move the momentum forward regardless of risks of the market.  This momentum in many ways helps make the hard changes required a possibility.

Variable 3: Developer interest

If you follow the developers, you will know where the tech market is going.   Here is a quick graph from Google Trends that shows blockchain job searches versus devops job searches—currently there is a lot of growing demand.

Variable 4: Venture Funding

From you can see that there is a healthy growth curve:

Variable 5: Smart money (Institutional Investors)

Keep an eye on what groups like Fidelity (more), Wellington (more), Morgan Stanley (more) and others are doing in the crypto space.

As an example, Barclays and Mastercard are both filing and getting awarded patents (more here and here).

Variable 5: “Blockchain” hype – everyone must have one…

In looking at Google Trends again you can see a clear hype cycle with blockchain in regard to searches in general as compared to other technologies shaping our future such as IoT and Machine Learning.   Clearly, mid-2017 was the start of the generalist mania.

Never forget what a blockchain provides: an immutable & decentralized ledger and a blockchain needs to keep those properties using a decentralized network with the following prerogatives:

  • Distribute the ledger — Validate
  • Append to the ledger — Work
  • Incentivize the user’s needs — Token

If it’s anything else, be skeptical…

I always say follow the developers but in this case, it’s tricky because so many entrenched camps have formed primarily due to how much money is at stake.  Once the big money (examples: Tim Drapers, Andresen Horowitz, financial svc) get involved they promote what they have invested in and then the social networks/media outlets jump on the marketing bandwagon.

The key to seeing through the hype is to follow the key mindshare leads in each area and not the media/venture capital/financial market promoters.  Follow key industry projects as close as possible (examples). Follow what governments are doing around the world.

You also must understand the tension that blockchain and cryptocurrencies create in the marketplace and watch how they respond to the threat.  Some examples:

  • Centralized institutions that are vulnerable to disruption, such as banks, will dig in. They are protected by existing regulations, which are ostensibly imposed to keep them honest but inadvertently constitute a compliance cost for disruptive technology. Those regulations, such as the burdensome reporting and capital requirements that the New York State Department of Financial Services’ “BitLicense” imposed on cryptocurrency remittance startups, become barriers to entry that protect incumbents.
  • Large companies like Google, Facebook and Amazon won’t sit idly and let their central portals be replaced by decentralized platforms. (more here)
  • Government’s won’t allow their currencies to be replaced by cryptocurrencies. Especially those government’s whose currency is the reserve currency.
  • Government’s won’t let their privacy laws be broken, for example, the new General Data Protection Regulation in the EU.

Variable 6: Timing – we are early!

In general, you must be cautious when:

For now, let’s go with Victoria Lemieux’s definition from the Verge article linked above until we have something official from the ISO: “In general, if the transactions are gathered together in blocks, and it is blocks that are secured on the chain using cryptography, and it is designed to be tamper-resistant and produce immutable records, the system qualifies as a blockchain.”

Variable 7: Count the REAL ‘use-cases’

For a list of blockchain use-cases refer to this article—you can choose if they are REAL or not.

In general, what can we do now, that we could not do before?  For example, before Bitcoin, nobody could own an asset in the digital realm. Since copying digital content is easy to do and difficult to stop, providers of digital products such as audio files or e-books never give customers outright ownership of the content, but instead lease it. Bitcoin showed that an item of value could be both digital and verifiably unique. Now we can represent any property title or music track as an entry in a blockchain transaction.

Variable 8: Architecture flaws in the underlying platforms

Always keep in mind that paradigm shifts have architectural issues—but it doesn’t mean those issues will stop the momentum—these issues just need to be understood and risk assessed.   For example, the internet was built on an insecure foundation, Linux had platform fragmentation issues, Open Source had many issues.   As you see with all elements of crypto and blockchain there are strong arguments about underlying flaws across the board.  For example:

  • Ethereum & block size – Ethereum has an architectural flaw that may catch up to it and all that runs on it—its’ no cap on block size –What does this mean for all the tokens built on top of Ethereum? More here on Ethereum’s scalability issues.
  • Bitcoin’s block time – The average block time for Ethereum is significantly less than Bitcoin’s: 12 seconds versus 10 minutes. This translates into more block confirmations, which allows Ethereum’s miners to complete more blocks and receive more Ether.

Variable 9: Decentralization

Blockchains need three properties:

  • Scale – The ability to support many users
  • Consensus – The agreement between each node on the validity of transactions.
  • Decentralization – A state of affairs in which there are many nodes and no one entity controls the system

In most cases, blockchain developers are only able to focus and succeed in two of the three properties necessary for decentralized blockchains.  For instance, blockchain developers can have a system that scales and reaches consensus, but it will be at the expense of full decentralization.

Its relatively easy to see how distributed the major coins are in the crypto-market (here is a good example: ) but what are the right ratios for new tokens or permissioned networks?

As blockchain matures measuring decentralization will be key.  Read here and here and here for more.

Also, keep in mind that decentralization is at multiple levels–for example, ~70% of the Bitcoin (12k) nodes are in China (more).

Variable 10: The single point of failure

When building a private blockchain you must look closely at the architecture and the business model to see if there is a ‘single-point-of-failure’ (SPoF).   For example, if you are using Hyperledger’s ‘ordering service’ does it create a SPoF—some think so?  What’s the value of a distributed database if there is a SPoF?  You have to also look at the business model –as an example: In a regulated environment the regulator has to be able to roll back a trade and that inherently makes them a SPoF.

Variable 11: ‘Store of Value’

Old school billionaires like Gates and Buffet say cryptocurrency has no ‘store of value’ so they are not currencies.   Others challenge the argument (more here and here).

The US Federal Reserve Chairman Jerome Powell made it clear (here) during testimony in front of Financial Service Committee of the U.S. House of Representatives (“The House”) with the following comments:  “if you think about what currencies do, they’re supposed to be a means of payment and a store of value, basically, and cryptocurrencies are not really used very much in payment. Typically, people sell their cryptocurrencies, and then pay in dollars… In terms of a store of value, look at the volatility, and it’s just not there.”

From a worldwide banking perspective, you can review the Bank for International Settlements (BIS) Annual Economic Report found here where they specifically call out “The second key issue with cryptocurrencies is their unstable value”.

Variable 12: Is the token/coin a security? (The SEC on tokens and Howey test)

The US take at the moment (from SEC William Hinman) is that Bitcoin and Ethereum are not ‘securities’ but most all ICO tokens likely are..  What does this mean for companies like Ripple with XRP?  Who knows but the impact of how the SEC deals with these companies and regulations needs to be watched closely.

Variable 13: The success of tokenizing a physical asset

There is a lot of discussion around tokenizing physical assets such as land, art, diamonds etc. however there are many issues such as how different countries laws impact ownership of assets.  Many of the issues are outlined in this article: here.


Using Ripple to understand valuation, risk and the SEC in the brave new world of blockchain

Given XRP is one of the more successful cryptocurrencies and Ripple (the XRP sponsor) has an incredible list of backers/board members and has been in business since 2012, they seem like a good company to use to take a deeper dive into the mechanics of the crypto market and analyze where some of the liabilities exist.

First, let’s go through a little background-In September of 2016 it was announced that Ripple raised $55 million USD in funding at a valuation of $410M USD.  The XRP token according to Chainfx was trading at $.007 USD on Sept 1, 2016.  Given there are 100B total tokens & 39.25% are in the market.  The market cap of XRP would have been $700M near the time of the valuation.  Today the XRP market cap is near $53 billion USD.

More from on Ripple’s valuation from David Schwartz, Chief Cryptographer at Ripple  “As Michael Nadolillo point out, Ripple did not create XRP. XRP existed before Ripple did.

As for how you value a company like Ripple, it comes down to two components. First is how to value the XRP that Ripple holds. The second is how to value whatever else Ripple might do that might materialize as shareholder value.

Presumably, the current price of XRP reflects some fair prediction of the value of XRP. If it was an unreasonably low estimate of XRP’s value, we’d expect people to buy it and cause the price to rise. Similarly, if it was an unreasonable high estimate, we’d expect people to sell and cause the price to drop.

So we can take the amount of XRP that Ripple holds and multiply it by the price of XRP to get a fair market estimate of the value of Ripple’s XRP. But you have to remember that Ripple will have to use some of the value of that XRP to incentivize partners, pay employees, and so on. It will not all materialize as value to Ripple’s shareholders.

Of course, some of that expenditure may translate into revenue beyond XRP for Ripple. For example, Ripple might trade XRP (or use revenue from XRP sales) to acquire equity in other companies. Ripple might use XRP (or revenue from XRP) to form new ventures that generate value from sources other than XRP.

So some multiplier has to be used to represent what fraction of the value of Ripple’s XRP you think will materialize as shareholder value. The challenging thing is that there doesn’t seem to be any good, objective way to agree on what this multiplier should be. I’ve seen knowledgeable people place it at 15% and I’ve seen them place it at 85%.

The market cap of XRP is not really a meaningful number for computing Ripple’s value though it does give a general idea of the economic importance of XRP compared to other digital assets. Ripple doesn’t own all the XRP, so the value of all the XRP doesn’t really relate to Ripple’s value.”

Ripple is essentially a high-value service that provides the ability for institutions to send money globally using the power of blockchain.   They have the RippleNet messaging systems for enterprises to use for cross-border payments and it does NOT require XRP–Ripple execs have even mentioned that XRP is not essential to Ripple’s business case (it’s just an add-on).  The execs have also mentioned that the ‘old’ cross-border payment systems cost ~20 basis points but with Ripple, customers could have a 6-basis point improvement using their platform without XRP.  With XRP there is an additional 2-basis  savings (note: this doesn’t take into account volatility of the XRP currency).

You have to wonder, does Ripple want to be the first non-sovereign private central bank leveraging cryptocurrency?

Ripple says they have 100 banks using their platform however it’s difficult to tell if those institutions are just kicking the tires or are they building out production systems.   You would think that these customers already have a ton of resources engaged in the ‘old’ way of moving money around for multi-national corporations and they make a ton of money doing it the ‘old’ way.   Also, these old-school banks and corporations are mostly risk-averse and if they think there are regulatory issues they will wait until those are clearly worked out.

Is XRP centralized or decentralized?

As opposed to Bitcoin, XRP does not seem all that decentralized–that may be a huge problem for the SEC… or maybe not.

  • Ripple says they are committed to decentralizing the XRP ledger and divesting operating control and giving up control of their validator nodes.
  • Bitmex did a report on Ripple / XRP where they downloaded the node software and all keys came from Ripple and they are in control of the consensus system.
  • Past CEO Chris Larson (17% of total) and current CEO Brad Garlinghouse (6.3% of the company) own a large share. (see here)

The most important point here is that most all cryptocurrency projects are going to start out centralized and then go to decentralized—it just seems to be taking Ripple a while to get there (it must be difficult). What makes this troubling is the market cap is huge and MOST IMPORTANTLY – the SEC has recently reported the following.  In this speech, William Hinman emphasized that “decentralization” is what makes Ethereum and Bitcoin NOT securities (absence of a “central actor” or third party who meaningfully determines “the enterprise’s success.”).  That can’t be good for Ripple.

Does Ripple need XRP?

Ripple may be a different animal (if they are really building a non-sovereign private central bank) however their platform seems like a permissioned system (private Blockchain) and tokens are not even necessary given the actors involved trust each other.   A permission-less system needs a token to incentive behavior because there are no middlemen.

If this is the case, the issue here is that they sold XRP to retail investors when was meant to be used by banks.

Is having a cryptocurrency worth the headache?

I guess all this boil down to is having XRP worth all the hassle when it only provides a 2 basis point saving for customers?

It seems that Ripple already has a great deal of interest and momentum from industry (MoneyGram is even interested). However, the cryptocurrency model seems to have lead to plenty of legal headaches (beyond what the SEC may bring in the future).  There is a lawsuit with R3 where Ripple granted options for billions of XRP at less than 1 cent in 2016 to incent R3’s banking network to adopt the platform.  Ripple canceled the option and now it’s in court.  There is also a class-action lawsuit against Ripple (see Bloomberg article here).  And there are other strange troubling issues–See the case of Jeb McCaleb family member froze funds at node level to get 1m back…

On top of all this, it also seems that even with all the success this company is having they are having difficulty getting listed in the most powerful exchanges (more here).

Bottom line – it may be worth the headaches IF the currency is what is funding the growth and the company can use this momentum to actually change a giant old school market.   It’s difficult to tell from the company’s quarterly reports where the revenue is coming from but you have to believe (after reading some of the background articles listed below) that the primary source of revenues is from the sale of XRP.

Net Net: If Ripple can steer clear of the SEC then maybe it was worth it and they will accomplish a sea change in the financial market.   …and just maybe the SEC sees the long-term upside in having this industry change!

Background reading:

Blockchain changes everything…

Back in 2012 I put in $1,000 into Bitcoin and started trading on MtGox – I was fascinated by the technology but in February 2014 I was burned when MtGox went bankrupt and changed my interests to cybersecurity.   Now several years later much has changed and I’m digging in again.  Here are my notes:

Introduction – Blockchain changes everything…

The world found cryptocurrencies like Bitcoin interesting (more about that below) but when they examined the cryptocurrency iceberg they realized how big of a disruption lies under the water—Blockchain is huge and can wreck every ship that runs into it…

Where are we on the Blockchain maturity curve? –Think 1993 when the Internet was just beginning to get the non-techs excited. Reference this great article by about how foundational technologies take hold here.

Blockchain has the same disruptive potential as the internet but will take time to mature—likely a decade or more.  However, some industries such as finance will see disruption sooner while others will take longer.

“distributed ledger technology could reduce
banks’ infrastructure costs attributable to cross-border payments,
securities trading and regulatory compliance by between $15-20 billion
per annum by 2022.” –

Blockchain frees transactional records from the need for verification by a centralized authority.   This doesn’t sound that transformational until you realize that almost everything relies on verifications from different central authorities (banks, retailers, iTunes, governments etc..)

The Internet enabled new entities to provide instantaneous access to information by digitizing information and making it accessible—mainly from the same (banks going online) or new central authorities (Google, Facebook, Amazon):

  • Email vs. the post office
  • Wikipedia vs. the encyclopedia
  • Amazon vs. the department store
  • Online banking vs. going to the bank

Public Blockchains in some ways disintermediates the concept of these centralized authorities and has the potential to replace the trust-providing function of traditional institutions like banks, escrow agents, and even the county courthouse.  (more here on disintermediating Apple, Facebook, Microsoft, Amazon, and Google)

Will Amazon be replaced in the next few years? Probably not, but wants to try…

The Value of Blockchain

Ripple calls Blockchain the “Internet of Value” (link).

“Our vision is for value to be exchanged as quickly as information. Although information moves around the world instantly, a single payment from one country to another is slow, expensive and unreliable. In the US, a typical international payment takes 3-5 days to settle, has an error rate of at least 5% and an average cost of $42. Worldwide, there are $180 trillion worth of cross-border payments made every year, with a combined cost of more than $1.7 trillion a year.

With the Internet of Value, a value transaction such as a foreign currency payment can happen instantly, just as how people have been sharing words, images and videos online for decades. And it’s not just money. The Internet of Value will enable the exchange of an asset that is of value to someone, including stocks, votes, frequent flyer points, securities, intellectual property, music, scientific discoveries, and more.”

For more on valuation: here.

What is Blockchain?

As stated previously, blockchains remove the need for trust in a system, ensuring that users can transparently interact with reduced reliance on third-party authorities.  When parties enter into a transaction, the transaction is broadcast across the network of computers. The network validates the transaction, using collectively pre-agreed, trusted consensus protocols. Once validated, the transaction is recorded in a new block of data, which is in turn added to the existing blockchain. Once added, it is permanent, immutable and resides across the entire network.

A blockchain is essentially a distributed ledger technology (DLT)

Imagine a company’s banking statement (ledger) with all the deposits and deductions and ever-changing balance existing on numerous machines versus at a centralized authority (bank).  Imagine then multiple mutually untrusting suppliers exchanging value (appending records or ‘blocks’) without a central coordinator (bank).  This network of computers would need to agree at regular intervals on the true state of a distributed ledger.

How Blockchain Works

On a blockchain, transactions are recorded chronologically, forming a chain (can be more or less private depending on the implementation. The ledger is distributed across many nodes in the network (versus in one place). Copies are simultaneously updated with every fully participating node in the ecosystem. A block could represent transactions and data of many types (currency, digital rights, intellectual property, identity etc..).

Public vs. Private Blockchain Networks


The difference between Public and Private blockchains comes down to who can participate in the network, execute the consensus protocol and maintain the shared ledger.

Public “Permissionless” Blockchain networks are completely open and anyone can participate in the network.

Private Blockchain networks or “Permissioned Blockchains” combine centralized user authorization with a decentralized blockchain transaction ecosystem.  The downside is that users still must place trust in an authority granting permissions as well as the consensus mechanism being utilized by the system.  Example: JP Morgan’s QuorumChain.  The upside is that the Permissioned Blockchain usually permits a couple of orders of magnitude greater scalability in terms of transactional throughput.

You can also have a “Federated” blockchain that operates under the leadership of a group. As opposed to public Blockchains, they don’t allow any person with access to the Internet to participate in the process of verifying transactions. Federated Blockchains are faster (higher scalability) and provide more transaction privacy. Example: R3 (Banks), EWF (Energy), B3i (Insurance) and Corda.

For more information see the article here.

Consensus models

The most traditional way to reach consensus is a Byzantine Agreement where nodes on a blockchain validate blocks of data by reaching consensus on the solution to a given problem. A Byzantine Agreement is reached when a certain minimum number of nodes (known as a quorum) agrees that the solution presented is correct, thereby validating a block and allowing its inclusion on the blockchain.

More here.

When to use Blockchain

This graphic from Wesley Graham @ Berkeley does a great job of showing the use cases to consider for blockchain:

Another great site that helps you figure out if you need to use Blockchain is and other models here.


  • Nasdaq Linq (link) to power capitalization tables
  • (link), a nonprofit that aims to bring affordable financial services, including banking, micropayments, and remittances, to people who’ve never had access to them. Stellar offers its own virtual currency, lumens, and allows users to retain on its system a range of assets, including other currencies, telephone minutes, and data credits.
  • Estonia prescribes blockchain for healthcare data security (link)
  • Musician Imogen Heap used blockchain to release a single directly to her fans (link)
  • P. Morgan (link) payment-processing network
  • BNY Mellon’s BDS360 for U.S. Treasury Settlement
  • Japan Exchange Group (link) is exploring blockchain for capital market infrastructure

We will see a great deal of innovation across all verticals in the years to come.  Here are a few you can expect:

  • Manufacturing and supply chain vertical – Use Blockchain to confirm the origin and movement of materials through the manufacturing process before and after actual production to reduce fraud and delays in the process or to improve financial reconciliation.
  • Healthcare vertical – Use Blockchain to improve transaction monitoring, identity services, and investigation of suspicious activities.
  • Public sector verticals – Use Blockchain to improve data sharing across agencies (examples: tracking birth and death certificates, citizen eligibility for benefits, and enabling the sharing of government employee profiles across government departments).

The Downsides

Public Blockchain network downsides

  • Competing blockchains – Currently there are a multitude of competing blockchains which do not connect with one another allowing assets to be exchanged like information, but industry standards will start to form (example:
  • Power – A substantial amount of computational power is necessary to maintain a distributed ledger at a large scale. To achieve consensus each node in a network must solve a complex, resource-intensive algorithm called a “proof of work” to ensure all nodes are in sync.
  • Privacy – which implies little to no privacy for transactions and can be a detriment to a company’s involvement
  • Security – Deep topic—let’s ask MIT: here.
  • Scalability – There are limits currently in the maximum number of transactions some networks can process (here and here)

Private Blockchain network downsides

  • Decentralization – Allows big organizations to retain their control of a market
  • Connectivity to existing systems
  • Regulations – Example: HIPAA, SOX, FDA, and GLBA
  • Privacy – The distributed nature of blockchain ledgers can make it hard to provide the privacy that some customers expect

For more on this topic see the Investopedia article titled Public vs Private Blockchains: Challenges and Gaps or Sorting out the advantages and disadvantages of public vs. private blockchains and Understanding Layer 2 Side-Chains for Scale.

Smart Contracts

A computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. Smart contracts were first proposed by Nick Szabo, who coined the term, in 1996.

Ethereum implements a nearly Turing-complete language on its blockchain, a prominent smart contract framework.

More on smart contracts can be found here: Smart Contracts: The Blockchain Technology That Will Replace Lawyers

Example, consider the case of domain name escrow. Currently, if A wants to sell a domain to B, there is the standard counterparty risk problem that needs to be resolved: if A sends first, B may not send the money, and if B sends first then A might not send the domain. To solve this problem, we have centralized escrow intermediaries, but these charge fees of three to six percent. However, if we have a domain name system on a blockchain, and a currency on the same blockchain, then we can cut costs to near-zero with a smart contract: A can send the domain to a program which immediately sends it to the first person to send the program money, and the program is trusted because it runs on a public blockchain.


Most Enterprise Cloud Providers (Microsoft, AWS, Google, IBM and Oracle) will provide APIs that allow customers to build enterprise private blockchain solutions leveraging their proprietary distributed ledger and smart contract frameworks.   Like machine learning APIs from these same platform providers, once you use the APIs you are locked into this cloud platform.

There are also many open source Blockchain platforms available.  For example: HyperLedger, Monax/Eris, HydraChain, MultiChain, Corda, and OpenChain

Technically… How does it really work?

Sean Han did a great job explaining blockchain with an example app he published.  You can find the article here.

Haseeb Qureshi also wrote a great article titled “The authoritative guide to blockchain development” that you can find here.


Blockchain Business Models

Most Blockchain businesses make money in one or more of the following ways:

  • Software as a Service –  charge a fee for using their infrastructure.
  • Flat Fees & Transaction/Subscription Fees – Maintain networks between a consortium of partners.
  • Service Level Agreements – Host infrastructure for enterprise customers (Microsoft, AWS, IBM etc…).
  • Cryptocurrency Speculation – Issue their own token. These companies do work that makes the market value of their token increase and then sells the token to speculators. <<More on this in the next couple sections…


Crypto Currency

You can’t dig into blockchain without mentioning cryptocurrencies as they are what drove blockchains current momentum and much is coming out of this momentum such as smart contracts and ICOs.

Start with this video:

First, let’s define what is money?

Money is not a thing (gold or a dollar bill).  Money is a record adopted by society to record who owns what.  If you use your credit card or PayPal real dollar bills and/or gold is not transferred—ones and zeros are…

FIAT Money (link) – “Fiat money is a currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.”

What is Cryptocurrency?

A Cryptocurrency is a medium of exchange, created and stored electronically in the blockchain, using encryption techniques to control the creation of monetary units and to verify the transfer of funds.   It has no intrinsic value in that it’s not redeemable for a commodity such as gold.  It has no physical form.  Its supply is not determined by a central bank as the network is completely decentralized.

Common Native Cryptocurrencies

  • Bitcoin — The first decentralized digital currency
  • Ether – A cryptocurrency whose blockchain is generated by the Ethereum platform (a blockchain-based distributed computing platform and operating system featuring smart contract (scripting) functionality).
  • Ripple — Unlike most cryptocurrencies, it doesn’t use a Blockchain to reach a network-wide consensus for transactions. Instead, an iterative consensus process is implemented, which makes it faster than Bitcoin.
  • Litecoin — A cryptocurrency that was created with an intention to be the ‘digital silver’ compared to Bitcoin’s ‘digital gold.’ It is also a fork of Bitcoin, but unlike its predecessor, it can generate blocks four times faster and have four times the maximum number of coins at 84 mn.
  • NEO — It’s a smart contract network that allows for all kinds of financial contracts and third-party distributed apps to be developed on top of it. It has many of the same goals as Ethereum, but it’s developed in China, which can potentially give it some advantages due to an improved relationship with Chinese regulators and local businesses.

There are many others such as Bitcoin Cash, NEM, IOTA, Dash, Qtum, Monero and Ethereum Classic.

Is this the future of money?  Undetermined.  According to Buffet and Gates, it’s a strong NO (link).  …and if you ask an esteemed economist like Paul Krugman he will tell you “to be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why Bitcoin should be a stable store of value.”.

…but what if, a country adopted a cryptocurrency as it’s official currency?  Venezuela tried… the Marshall Islands is trying (link)… Sweden (link).  Estonia (link).  Japan/Canada/Germany/Holland (link)…  and to note: Japan recently recognized Bitcoin as legal tender (link).

Net/Net: Cryptocurrencies are not going away as Gates/Buffet/Munger are predicting, however, they are probably correct in the assumption that it won’t replace the US Dollar as the reserve currency any time soon.  More on this argument here.

Pros and Cons of a global cryptocurrency (Coin) as an alternative to FIAT


  • Medium of exchange without the use of an intermediary (bank):
    • Rebuttal: Artificial scarcity is essential to cryptocurrency’s speculative value but works against making it a viable medium of exchange. Why would you buy a soda with Bitcoin if one day it’s $1, the next $5, and the day after that $10?
  • Low-cost international money transfers: This is a multibillion-dollar industry that’s mostly set up to exploit working-class immigrants with fees (Western Union, PayPal or Plimus skimming 3-10%). With cryptocurrency, the transfer fees are negligible, and the transfer times are near-instant (usually less than 30 minutes).
  • No government intervention: Allows citizens to not have their capital tracked by governments as a means of control in the case of 1) Seizure resistance by badly acting governments and 2) Ease of transport of currencies across international boundaries (cryptocurrencies allow you to cross a border with literally a billion dollars in your pocket)
  • Ability to sell a digital good: For example Music & Photography
  • Replace central banks:
    • Rebuttal: Well-run central  banks  succeed  in  stabilizing  the  domestic  value  of  their  sovereign  currency  by  adjusting  the  supply  of  the  means  of  payment  in  line  with  transaction



  • Speed: Public permissionless blockchain networks are slow and will not scale to yield transaction throughput on the scale of Visa/Mastercard
    • Rebuttal: Layer 2 solutions (Lightning & Raiden)
  • Use enormous resources: Public permissionless blockchain networks require enormous resources (bandwidth, memory and CPU). The ledger is shared and maintained by every node of the network. To be a node in the network, one needs to download the whole ledger/blockchain and keep it on their system. Distributing a ledger potentially consumes over a hundred times the energy of single databases. Scaling up from relatively niche use could be impossible.
    • Rebuttal: Proof of Stake consensus systems and Layer 2 solutions
  • Won’t pass regulatory scrutiny: Governments won’t tolerate the loss of monetary control. The US government specifically is not going to allow wide-scale movement of money within the United States in which it can’t identify the sources and uses.  Governments also won’t tolerate illegal commerce (especially if used for terrorism).   Eventually, societal pressure to regulate cryptocurrency will increase as more fraud (example: market manipulation) is discovered. Most people want strong governments, and strong governments want to control their own currencies.
  • Cryptocurrencies are not a “stable” store of value. They operate less like a “currency” and more like a “stock” whose price fluctuates. What % of today’s BTC is being used to purchase services? Less than 1%?
    • Rebuttal: In economics, something has value if it checks the following two boxes: scarcity and utility. Scarcity means that something has a finite supply. In the case of bitcoin, the cryptocurrency has a set cap of 21 million bitcoins. Cryptocurrency’s utility lies in the fact that no government, bank or single person has control over it hence it can’t be toppled by corruption at the top.  Gold has underlying utility value in applications such as semiconductors and jewelry. Real estate has underlying value for building, farming, and mining, among others.  Cryptoassets have an enormous amount of potential underlying utility value, promising to disrupt just about everything, including payments, record keeping, legal contracts and many other industries.
  • Country-specific monetary policy is required for a stable society, to offer benefits (Social Security, Medicaid, Medicare) to its population and to finance wars
  • Credit and cryptocurrencies play poorly together.
  • Deflation is bad. Bitcoin caps out at 21 million total BTC in circulation; Litecoin at 84 million LTC. These fixed supply mechanisms give them deflationary characteristics over the long term.
    • Rebuttal: Ethereum (ETH) chose to uncap the total supply of their coins and opt for long-term, pre-determined issuance schedules. No-cap cryptocurrencies are thus inflationary in nature. The risk with inflationary cryptoassets is that new, future coins entering the market will reduce the value of existing coins by increasing the supply relative to demand.
    • Rebuttal: A cryptoasset with deflationary characteristics could theoretically be a better store of value because existing coins are protected from future supply-based dilution.
  • Quantum computing: The entire blockchain assumes that hash problems take a constant time to solve. If someone can solve a hash problem even slightly faster, then the whole blockchain system fails to work.
  • Fragmentation: like Linux, many cryptocurrencies are open-source causing new currencies to appear quickly.
  • Lost keys: Cryptocurrency stored in a public permissionless blockchain can be lost forever if someone loses their key. Hence, most people won’t want to maintain their own private keys, and if you don’t maintain your own private keys, cryptocurrencies are essentially no different from fiat money held in banks.
  • Economics of Proof of Work: For cryptocurrencies that using proof of work (mining) as their consensus mechanism–If the market value of the reward for mining drops below the cost of mining, then miners will stop mining, and nobody will process transactions.
    • Rebuttal: Proof of Stake


ICO – Initial Coin Offering or “Token Sale”

It’s import to understand what a “Token” because it is one of the ways that a company can build a business model to fund a ‘Public’ blockchain network.   It’s also important not to confuse a “Token” with a native “Coin” (Bitcoin, Ether, Ripple, Litecoin etc..).

In an ICO a company will sell a quantity of cryptocurrency to investors in the form of “tokens”, in exchange for coins (other cryptocurrencies such as bitcoin or ether). These tokens become functional units of currency if/when the ICO’s funding goal is met.  Most companies develop a decentralized application (Dapp) where the custom token provides a unique utility in using the company’s product.  However, tokens are exchanged freely using the native coin protocol, so users can trade them in for other cryptocurrencies or fiat.

Tokens, in general, are not the same as shares in a company as they do not provide an ownership stake (voting rights) in the company. Tokens are simply vehicles with which to conduct transactions for the goods or services within the company from which they are issued. After the ICO where the company sets the price for the tokens, their value is based on supply and demand.

A token is like a concert ticket. Tickets are bought and sold, and their value depends on the popularity of the band.  The exchanges (StubHub) facilitates the buying and selling of tickets. There are limited numbers of tickets just like there are a limited number of tokens. An ICO is like pre-purchasing tickets for future concerts at a very low cost. The band may or may not be around in the future but if you can spot the diamond in the rough, your tickets could be very valuable in the future. If you pre-purchase tickets to a band that goes nowhere, you lose everything.   <here is another funny analogy that explains and ICO/Token sale>

If a company creates a token in Ethereum, it is created as a smart contract, with each token being governed by a single, unique governing contract.

Types of tokens

  • Utility Token – Provide exclusive access to software utility (or service) by having the token or in exchange of token.
  • App-payment token – Provide means of payment in a technological ecosystem where more than two parties are involved.
  • Security tokens – Provides a return on investment through profit or revenue sharing, it includes voting rights, constitutes a part of equity and may provide buy-back guarantees.

The advantages and disadvantages of a token sale


  • Quick and low cost – ICO’s do not require intermediaries to get involved (in contrast to typical venture capital) so raising funds can be fast and low cost
  • Liquidity – Investors can sell at any time
  • Real-time risk pricing – Investors always know where they stand in regards to the value of their tokens
  • Visibility on an exchange can help the company attract developers and users


  • Getting listed on an exchange can be costly (link).  Access to the best exchanges carries a premium because the bigger the liquidity pool, the higher the potential market value of a coin, and the higher the chance of success for a project.  You can find a list of exchanges here
  • Once a cryptocurrency project is launched and listed on an exchange it trades live and faces the public scrutiny that comes with being a publicly listed company
  • The nature of ICOs can attract speculators that do not believe in the long-term potential of the company


The ICO Steps

  1. Release a “white paper” which details the plans for a given cryptocurrency, including what it will do, why it is useful, the roadmap for building the project, and a plan to use the funding raised. More on whitepapers can be found on this blog post.  Here are some example of whitepapers.
  2. Allow people to register for the whitelist to gain access to a pre-sale round.  More on whitelists can be found here.
  3. When the pre-sale period occurs investors will contribute funds by sending Bitcoin (BTC) or Ethereum (ETH) to a designated wallet address. If the project reaches its funding goal, tokens of the new cryptocurrency will be sent in return when the coin is launched. If the project does not meet its funding goals, the contributed funds will be returned.
  4. If the project reaches its funding goal and distributes the newly created coins, it will launch on an exchange where it can be traded.

Stable Coins

a ‘Stable Coin’ is a cryptocurrency that is pegged to another stable asset, like gold or the U.S. dollar. It’s a currency that is global but is not tied to a central bank and has low volatility.  For more on stable coins: here.   More on asset-backed tokens (ABT) found here.

Tokenizing real-world assets

More here.

If you are “Long” on Cryptocurrencies then you should really really really read this great article: The Natural Order of Money and Why Abstract Currencies Fail by Roy Sebag.


Note: Currently the legal state of an ICO is undefined. Is a token a financial asset (a security) or a digital good? What is the SEC going to do? (link) I’m sure we will hear something soon (link). –“The Securities and Exchange Commission and the agency that Mr. Gensler led from 2009 to 2014, the Commodity Futures Trading Commission, are in the middle of determining how to categorize and crack down on many of the virtual currencies created in recent years. Most of the focus has been on smaller currencies that were issued through so-called initial coin offerings, or I.C.O., a method of fund-raising in which entrepreneurs sell custom virtual currencies.”.  Keep an eye on the Swiss too (FINMA).

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