Why Crypto & Open protocols?
The current hype around crypto is not necessarily new. Around 2017 , we had witnessed renewed interest due to steep price increases & spate of project launches with ICOs. However, as soon as the price plummeted, enthusiasm was curtailed.
The current season, starting around early 2020, is on an even higher scale . A steep price correction cannot be ruled out entirely.
In all this noise around prices & event driven news narration, the core question of “Why crypto” gets lost or is not addressed appropriately.Token price appreciation as an answer is not enough. Many of projects in news today may not amount to anything. Crypto market is finicky. Just look at top 10 market cap tokens in 2014 & 2017. The list looks quite different . Many of the tokens have disappeared from the scene completely.
Only 2 tokens - Bitcoin & Ripple(XRP) are left in top 10 in 3 short years.
And only 4 tokens from 2017 are left in 2020.
The market might look very different in Jan , 2023 compared to today.
It is understandable that retail investors are joining the bandwagon for purely speculative purposes. But this crowd will vanish post a severe price crash.
More importantly, the “Why Crypto” questions is needed to be answered so that Entrepreneurs, Builders & Developers can be convinced of the inherent value of crypto. Subsequently, they will create new innovative solutions on top & increase utility of applications built around crypto. For them too, mere Token price increase is not good enough answer.
In addition, anyone looking for long term investment asset identification should have the ability to separate the noise from the signal.
For anyone looking to make a career in the industry , it becomes even more vital so as to avoid incorrect roles/projects in the industry to focus on. The current narrative is divided in extremes wherein the proponents of crypto proclaim it as world changing & the sceptics decry the same as wasteful database/Den of criminal activities.
In light of these major goals, below is Product angle attempt to answer the question - ” Why should anyone bother”?
Early Internet - The Original P2P technology
It is essential to look at the Internet History first. It is well known that the broader internet project started as an Academic/Military project. The initial nodes connecting each other were universities. The aim of the connecting nodes was to utilise processing capabilities of large, expensive & highly specialised computers in those days. Telnet ,ability to login to remote computers & perform certain tasks, was one of the first applications built.
In one way, Internet started out as pure peer to peer(P2P) communication network.
Hence, the DNA of internet has decentralisation inbuilt with no gatekeeper.
However, today the market is dominated by few extremely large & centralised privately held corporations. Therefore, a quick detour of how a technology which started out as P2P(Peer to Peer) ended up being where it is now - extremely centralised on a global scale- will get us to the core answer of “Why Crypto” might or might not be relevant.
The initial users of internet were academics interacting with each other. The future trajectory for the technology was not clear & it was not commercialised at all. The academics trusted each other & therefore , initially security required no active consideration in the internet architecture. Internet was not for commercial purposes & nobody had envisioned risks of data leaks ,privacy violations or viruses & malwares. Therefore the core of internet evolved around theme of co-ordination among peers & the structure of client-server model is patched on top of it decades later.
This is one of the primary reason why security is quite poor in applications today. In the early days, the only concern was performance & around this primary goal the architecture of internet has continued to evolve. Security is often an after thought , if at all.
The client - server is model is imposed on such peer to peer core model with server side( basically just another computer) with special endowed capabilities ( root power). No wonder security on internet seems like applying patches of tape on a pipe spewing data with leaks everywhere. One small open entrance is enough to gain exposure to sensitive private data on a centralised computer(server). Even if certain security solutions are being deployed, the idea of one computer endowed with special privileges via root power is an architectural anomaly. The human element of control with root power has major implications that leads to imbalances in power.
The Scalability Trilemma
The scalability trilemma introduces the concept of trade-offs involved in architecture of technologies. The reason i am introducing the concept is to highlight the contrast between core internet architecture & blockchain technology.
To summarise the topic , the scalability trilemma highlights the inherent trade-offs involved among Scalability/Performance, security & decentralisation. As you can guess, the core aim for the internet project was performance. Security & centralisation/decentralisation did not even figure actively in the conversation then. Instead it can be argued that due to the main goal of performance as primary objective- heavy centralisation & low security evolved naturally. Internet has indeed achieved its desired goals of performance. Plenty of quality applications have been built & organisations perform countless trial & error to produce the best UX.
The trade-offs side effects are also becoming more apparent. Since, performance requires ability to make quick changes for trial & error , powerful centralised platforms constantly change the rules of the games. This makes developers & organisations built on top of such centralised players extremely unstable.
There have been various events such as Twitter shutting down APIs, Facebook changing rules on gaming ads , Apple launching rival applications. All these have made consumer Tech space extremely boring as a result.
Era of Open Protocols
It is prudent to introduce the concept of protocols at this stage. In very simple terms , a protocol is a set of specifications that helps individuals co-ordinate with each other in a standardised manner.
Chances are you are already aware of HTTP, TCP/IP , SMTP , FTP etc. Each protocol has a specifically goal to achieve.
The above protocols were all developed almost over 3 decades back & were necessitated to make internet work as we know it today.
The internet then was primarily funded with grants & with sheer voluntarily effort from countless enthusiasts. As the internet got privatised & grants were no longer existing, it became extremely difficult to incentivise the creation of new protocols. As a consequence, protocols for more evolved use cases such as Social media could not be developed. Some rudimentary attempts such as RSS were widely adopted however, in order to provide rich functionalities of Social Media, the open protocols were not suitable. The core issue was incentives. If you as entrepreneur could capture value only via centralised privately held corporation, why would you attempt to create open source protocols when even grants were not a viable alternative?
As a result,
Till recently, even if you were able to develop a kickass new protocol, there was no method for you to capture the value generated with its adoption. Notice that the major protocols such as TCP/IP, HTTP, SMTP, FTP are central to the Web however there is no value ascribed in Dollars or rupees to such protocols. The individuals behind the major protocols such as TCP/IP, SMTP have hardly had any wealth accumulation even due to increased use of such protocols. Few of the protocols such as SMTP were eventually monetised by mail ads but the value accrued to the applications( Gmail, Yahoo mail) , instead to the protocol directly.
The early protocols had to adopted among the wide array of users, builders , developers , entrepreneurs to make it viable. Protocols have inbuilt network effects - the more users & builders start adopting it, the more likely that the a new user/developer entering the fold will adopt it. However, as mentioned, Since there was no inbuilt incentive , the adoption was achieved through a mix of diktats & voluntary efforts. Since the market size of users & players at the time of such early protocol development was very small , it was also very easy to get the alignment on protocol adoption.
Contrast to today , there are billions of users & millions of developers/entrepreneurs . It might be impossible to achieve the adoption of protocols without any incentives.
Protocol development Incentives
Cryptographic tokens solve the inherent challenges in incentivising the development of protocols. Cryptographic tokens are linked to a protocol & you can imagine it as a method or utility to use the services of that protocol.
Imagine a hypothetical alternative scenario that HTTP had its own token , called http (smallcase) , & publishers on the Web needed the http token to be able to deploy their websites for access. Similarly, you as reader of a website required the native http protocols to access the content for a certain duration. Based on demand of the protocol use, the demand of token would rise & fall in conjunction. The web would have looked very different & probably lot more open. Similarly, if you needed smtp token to be able to send mails. This would have let the protocol accrue value that it generates & also provide an incentive of development on new ones.
Indeed this is that is what is happening in crypto primarily. As a protocol developer, you can now launch a new protocol & retain some of the tokens. If the protocol becomes widely adopted & increases in value, you have captured a portion of the value generated.
This is very novel method of monetising protocol development. Prior to tokens, the options available were to sell softwares that implements the open protocol or through indirect mechanisms such as Support functions ( e.g. Redhat).
Such inbuilt incentives can create new protocols that are suited for more evolved applications such as Social media applications in a more open & democratic manner.
The open nature of the protocol avoids extreme centralisations on part of founders, as is prevalent today. If undesirable levels of centralisation is found in a protocol, the protocol could easily be replicated with more decentralised & distributed token structure by a new team. This process is called forking. Here is a thrilling event that transpired wherein an attempt of takeover of a project( Steemit- kinda like decentralised Reddit) was foiled & a rival project(Hive) was successfully launched to avoid extreme centralisation.
Tokens also provides right set of incentives for the early innovators & adopters that solves the “Chicken & Egg problem” inherent with any protocol adoption.
Let us attempt to run through an example to illustrate this. Say, you have created a social media application & wish to attract new users to the platform. For early users, the utility of the platform will be very low since none is currently using it. The successful social media platforms of today such as Reddit, FB solved this issue in myriad different ways. For example, Reddit founders created its own contents till enough user base was onboarded & platform could function self sufficiently. FB started out with Harvard’s student book to get initial users.
Tokens solve this issue at the very core. You as the social media platform creator will be offered tokens as “Early adopters” of the platform. The tokens would be very similar to equity ownership in a company. The lure of financial gain & ability to own the social media platform would attract early adopters easily. Each user could be paid tokens based on the usage & contributions they make to the platform with content & engagement.
Actually, this is not a hypothetical scenario. There are various projects attempting the same Steem(similar to reddit with own native blockchain) , Bitclout, creaton.
Early users are likely to accrue significant benefits & they in turn will become ambassadors of the platform due to inbuilt network ownership through tokens.
This flips the network building model since now the earliest users get more benefits if they join early & have more incentives to join instead of the traditional alternate model wherein it only made sense to join a network if it had already few users on it. Wikipedia is very interesting example since it attracted all the volunteers organically. However, just imagine if token incentives were inbuilt within the platform to reward volunteers for their invaluable work.
Tokens have the potential of replacing current dominant model wherein a private VC funded company, e.g.Uber , FB , Instagram, firsts builds the network of users & starts monetising the value from the network once critical mass has been achieved.
Imagine a uber owned by its drivers with inbuilt mechanism of attracting early drivers onto the platform or a Twitter platform for rewarding early content creators on the platform. The mind boggling expenses that Uber incurred & still incurs in attracting & retaining drivers could be managed more easily by simply aligning their incentives with ownership of the network.
The major mantra of startups being built in last 90s was “Internet first”. Players such as Amazon were able to survive, despite dot com crash & onslaught from extremely powerful incumbents , due to adoption of a new technology. Similarly, the mantra of start ups in 2010s was mobile first. We are likely to see a new theme of tokens first in the coming decade & the process seems well underway.
The protocols also create a organic marketing channel. Bitcoin is not controlled by anyone & has no Product team , no sales & advertising budget. However, within a very short duration of 12 years, it has achieved over $ 1 trillion market cap. Bitcoin owners with their countless articles, tweets & videos have organically served as marketing channels to amplifying the value of the protocol.
Value of Open Protocols
Open protocols have enabled a vast open eco-system & generated massive wealth over last 2 decades. Ironically , because the protocols do not capture any value , that implies that none controls them. This provides the assurance that specifications will stay the same & with that comfort, developers can build applications on top of it. Even today, web remains open, except in few cases of censorship at ISP/Country levels. If you have a PC & browser, you can technically access any website with no central gatekeeper dictating terms & charging taxes for access. You can also publish anything with assurance the assurance that users will always be able to access the content.
HTTP as protocol enables decentralised & censorship resistance publishing/application development . You can buy a domain, set-up your own web server & publish your materials & you can be assured that it will be accessible to all the users surfing on the web. Google with its search engine might enable/disable discovery of your blog, but it cannot suppress it entirely. Not to mention, if user types in the url directly, he/she is guaranteed the content.
Contrast the same with mobile app eco-system. Most of the applications today are at the mercy of duopoly of Apple & Google with their direct control of app distribution. They also charge an exorbitant 30% tax rate. The rules can change randomly & developers have limited leeways . Consider the countless court cases currently going on w.r.t Epic vs Apple, Spotify vs Apple etc.
Nature of Open Protocol based applications
Since the protocols such as TCP/IP & HTTP are stateless, they require stateful applications to enable functionality. Companies such as Google, Facebook & countless others were founded on top of such open protocols. The open nature of protocol was why the most dominant company in 90s, Microsoft , could not vanquish such new upcoming start-ups.
With time , we have understood that “Data” was key to enabling superior UX & key competitive advantage for organisations. With time, such stateful applications captured all the value. The extreme centralisation of the web into handful of extremely large companies is driven by valuable data lying in silos.
As a consequence, Interoperability is completely missing from the scene. One way to visualise the phenomena is in terms of “thin protocols-with little or no value capture” & “fat applications- built on top”. Therefore, on internet the dominant model to emerge was suited for applications development & proprietary data . Protocol development had no or limited incentive.
This relationship between protocols & applications is exactly opposite in crypto. With its token , open nature & interoperability built in , the blockchain protocols such as Bitcoin & Ethereum capture most of the value. The highest market cap tokens are all layer-1 protocols. In comparison, the applications built on top are only a fraction of the layer-1 protocol value. Because the layer-1 protocols capture all the data & work as settlement layer for applications, the data as key differentiator advantage is not available. Therefore, the business model on crypto is likely to evolve uniquely. One such example of business model innovation can be viewed here.
Therefore, the visualisation produces “fat protocols” & “thin applications”.
Such inbuilt interoperability is noteworthy & likely to produce a dynamic eco-system since entry barrier for new applications is reduced.
Potential of Blockchain - Public vs Private
Blockchain is an alternate mechanism of creating applications in decentralised manner. It is important to note that blockchain with centralised control simply translates into a wasteful database.There are probably more effective alternatives such as APIs to solve the use case that has centralised control with blockchain inbuilt. This is why the “private blockchain” does not appear to be the most promising evolution of the industry.
Blockchain combined with tokenisations & decentralisation( Public Blockchains) are likely to confer entirely new capabilities that will enable novel ways to achieving “jobs to be done”.
One such example is “Smart Contracts”( immutable computer codes) deployed on public blockchains vs private ones. The whole new use case that Smart contract enables rests on decentralisation. If one or few entities have capability of changing the Smart contract deployed, it would just be similar to FB changing its application codes. Cloud platforms such as AWS & Azure do offer capability for organisation to create managed blockchains. The promise of managed blockchain it yet to materialise on large scale. Whereas Public blockchains have created a dynamic new eco-system from scratch.
Chris Dixon’s article on strong & weak implementation offer a model to visualise this phenomena.
One example to consider is how internet enabled very new capabilities that did not exists in offline world.This created a very new competitive dynamic with very different cost structures & revenue models.
let’s quickly see how e-commerce fits this model. In the diagram below, we try to view the contrasts between “Offline visit store” & “Online purchase” on various parameters.
The arrows on each such parameters such as “discovery of SKUs” or “Checkout Experience” cover the capability the each model confers. So , for example, since reaching the offline store takes some effort on part consumers, once they are in the store, the commitment to buy is very high. Whereas visiting a e-commerce store is trivial with a device & internet connection. This convenience though leads to extreme competition & very high cart abandonment. Entire new solutions were created from scratch to solve the new challenges of cart abandonment on e-commerce store. To summarise, the internet enable a very new capability & hence entirely new method of the same “Jobs to be done” with its own unique challenges. Offline commerce is still quite big but e-commerce has higher growth rates.
Early days
It is early days however the growth will likely be exponential. Just recall how both setting up an e-commerce store for an entrepreneur & accessing the e-commerce store on part of consumers was quite cumbersome in late 90s. Entrepreneurs were required to buy expensive hardware & set-up servers. For delivery , such platforms relied on existing logistics players - often leading to poor experiences of damage, late delivery & theft.
For consumers, internet was expensive & online payment was still in its infancy. Cloud computing combined with new payments solutions ( Paypal, Banks adopting online payments vigorously) to cheap internet & proliferation of mobile devices & GPS all contributed to dramatic rise for e-commerce with increasingly superior UX. Though it started small & slow, the growth has been exponential since late 2000s. New upcoming technologies such as AI/ML & AR ( Augmented Reality) are likely to further add to e-commerce’s arsenal more new capabilities. While offline stores will also adopt & benefit from adoption of some of these technologies, the constraints such as heavy fixed investments, existing know-how, inherent different cost structure & sheer inertia will likely limit the benefits achieved. This is why major players such as Walmart have found their acquisitions (Flipkart) way more successful than internal projects that aim to capitalise on e-commerce.
What those accelerants will be crypto is impossible to know today. The impeding regulations of powerful centralised companies starting from Google to FB could likely be one. However, it is mere speculation. But the catalysts will amplify the new capabilities of crypto further on exponential scale.
Possible Future
There is lot of noise currently & speculative mania reminds of the internet based startups in 2000s before the severe market crash. In the din of price movements, new launches, regulatory news etc. the core logic might easily get lost.
Similar to internet based startups, the technology does offer an opportunity to create entirely new experiences. However, lot of the projects being launched today may not materialise at all. Therefore, caution on part of retail investors is warranted. It is essential to understand the project behind the token, what use case it solves & how it utilises inherent new capabilities of crypto. The same is done in stock investment wherein entire industries have been built around simply analysing the organisation’s potential behind the stock. The corresponding industry is yet to be created for crypto. While a stock price is often primarily based on Cash flow based model, the model for crypto is very different- probably a combination of scarcity, supply & demand . All such gaps do offer opportunities in droves & tumultuous times are ahead for sure. In such an atmosphere, the ability to separate noise from the signal is a wonderful arbitrage.