Public Blockchains - The Next Era of Digital Disruption: Part 1
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
A Very Brief History of Innovation
"Economic growth occurs whenever people take resources and re-arrange them in ways that make them more valuable…every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new ideas were discovered. And every generation has underestimated the potential for finding new ideas. We consistently fail to grasp how many ideas remain to be discovered…possibilities do not merely add up; they multiply.[1]”
Innovation is why most people live in prosperity compared to their ancestors. The most transformative innovations consist of developing novel ways to harness energy to execute defined tasks more efficiently. For example, the steam engine converted heat energy into mechanical energy to produce power more efficiently. The steam engine allowed civilization to overcome the limitations of biological muscle and produce the requisite quantity of power needed to enable the industrial revolution. Further, the computer harnessed electrical energy to store, retrieve, and process information more efficiently. The computer allowed society to overcome the limitations of the human brain and accumulate and transmit data at the scale needed to enable the information revolution.
Today, digital assets secured by public blockchains are an emerging innovation that harness monetary energy to more efficiently generate, store, and transmit value. Innovations occur gradually and rely heavily upon the combination of existing ideas and trends of the time. Identifying and understanding the nature of existing trends is key to fully appreciating the innovations to which they give rise.
Public Blockchains: The Emergent Innovation of Computer Enabled Digital Networks
The technological innovations that have profoundly transformed society in recent decades have been the byproduct of the confluence of three macro trends: i) computerization - driven by exponential growth in compute power, ii) digitization - driven by the widespread conversion of analog information into digital information, and iii) value creation driven by the emergent properties of networks.
The bedrock of the technological revolution of the 20th century is the observation known as Moore’s Law, which is shorthand for the observation that compute power doubles every 18-24 months. The power of Moore’s Law is that it allows for tasks that historically would have taken immense compute power to perform historically to be performed at progressively lower effective cost, which increases the commercial scope of the products and services that can be built. Growth in cloud computing, social media technologies, artificial intelligence, and autonomous vehicles are each the beneficiary of the availability of increased computing capabilities at declining cost.
In the last two decades the trend of digitization has transformed business models and consumption habits. Simply look at the home screen of your cell phone – majority of the apps on the home screen of your phone used to primarily exist exclusively in the physical world. However, today, they primarily exist in the digital realm. The world’s largest bookseller is a software company (Amazon), the world’s largest video service by number of subscribers is a software company (Netflix), the dominate music companies are software companies (Spotify), the fastest growing telecom companies are software companies (Zoom), the largest news outlets are software companies (Twitter), we primarily communicate with friends and family via software companies (Facebook, Gmail). Software has leveraged low-cost compute power to effectively dematerialize a large quantity of analog goods and services.
Digital information has two unique properties:
1) It has close to zero marginal cost of reproduction
2) It is non-rival – one person’s usage does not keep anyone else from using it
These two properties, in conjunction with the internet, allow for far superior distribution of goods and services. For example, if you want to publish a digital book you can simply duplicate copies to millions of people for nearly zero marginal cost and they can all read the book at the same time. Zero marginal cost of reproduction and non-rivalry result in massively large market opportunities – digital markets are significantly larger than analog markets.
While digitization allows for large markets, it does not mean that large markets will be valuable. Large markets that result from digitization are valuable because of network effects and Metcalfe’s law, which states that the value or utility of a network is proportional to the number of users of the network. Simply, digitization allows for larger markets, which facilitates the usage of a product or service by more people and as more people use a given digital product or service the network can become more attractive and attract even more users – the size of the network increases the value of the network. Digital networks are immensely superior to analog networks and allow us to do things smarter, faster, and stronger.
Public blockchains are harnessing low-cost compute power to digitize, store, and transmit value (money, artwork, banks, corporate owned internet platforms) across digital networks without the need for a trusted intermediary.
In the same way that digital information networks are superior to analog information networks, digital networks of value will be superior to analog networks of value. Digital networks took all forms of information and services and put them on the internet. Public blockchains are taking all forms of value and putting them on the blockchain.
Who did what recently:
Ray Dalio’s Bridgewater Investing in Crypto Fund Link
Citadel founder Ken Griffin said the firm plans to be a market maker in crypto in the coming months. Link.
Intel launched a crypto mining initiative, with Argo Blockchain and Jack Dorsey-led Block (SQ) receiving the first mining chips. Link.
BlackRock plans to offer crypto trading to its clients. They also have plans to allow investors to borrow using crypto collateral. Link.
Bain Capital announced the formation of Bain Capital Crypto, a $560 million crypto-native fund Link
Katie Haun’s Crypto VC Fund Raises $1.5 Billion After a16z Departure. Link
[1] Brynjolfsson, E., & McAfee, A. (2016). The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (Reprint ed.). W. W. Norton & Company.