Real Ventures Crypto Brief - February 21, 2018

The programming of people has been a progression from dogma to influence to incentives, a progression that leads to increasing personal freedom. Dogma is orderly, but rigid and prone to exclusion and stigma. Influence is subtler yet insidious with its theft of privacy, time and attention. Incentives, through mechanism design, reward specific personal choices, but also place a “dollar” value on every aspect of work, life, and play. Protocol and dApp developers are free to create projects that reward both the noble and the diabolical. 

As many of you experience every day, the world is undergoing a global digital transformation where digital and physical reality are blurring into a single integrated modern way of living. This new world needs a new model for digital identity, one that enhances individual privacy and security across the physical and digital world.

Each of us needs a digital identity we own, one which securely and privately stores all elements of our digital identity. This self-owned identity must be easy to use and give us complete control over how our identity data is accessed and used.

With your permission, I’d like to begin briefly with a slightly different perspective, and that is, as a dad. I’m the father of three college age children, a senior, a junior and a freshman. During their high school years, we tried to interest them in financial markets. My wife and I set up small brokerage accounts with a few hundred dollars that they could use to buy stocks, yet other than my youngest son who owned shares in a video game company, we haven’t been able to pique their interest in the stock market. I guess they’re not much different than most kids their age.
Well something changed in the last year. Suddenly they were all talking about Bitcoin. They were asking me what I thought, and should they buy it. One of their older cousins, who owns Bitcoin, was telling them about it, and they got all excited, and I imagine that maybe members of this committee may have had similar experiences in your own families of late.
It strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one, and yet we must crack down hard on those who try to abuse their enthusiasm with fraud and manipulation.

Ethereum lets us build layer 2 solutions to access new points on the tradeoff matrix between speed, finality, and overhead cost. This makes the underlying blockchain more useful for a larger variety of applications, since different types of applications with different threat models will have natural preferences towards different tradeoffs. For high value transactions where we want protection against even nation-states, we use the main chain. For trading digital collectibles where speed is more important, we can use Plasma. Layer 2 lets us make these tradeoffs without compromising the underlying blockchain, preserving decentralization and finality.

The uniting argument in the above articles is that tokens that are not store-of-value assets will generally suffer from high velocity at scale as users avoid holding the asset for meaningful periods of time, suppressing ultimate value.

There is an infrastructure inversion on the horizon. We have suffered several infrastructure inversions in the past century. They are never obvious, only in hindsight. Cars were made fun of when they got stuck in mud roads dominated by horses. Once the infrastructure switched and roads improved, horses could still walk on them, but cars got way faster. Telecommunication companies refused for years to switch from analog to digital to communicate more data. Once they did, it was trivial to run voice over their new infrastructure, but the other way around was almost impossible. I think the same is true with Bitcoin: traditional banking that takes days and charges high fees can be easily implemented on Bitcoin, but the opposite is not true.

He had invested in bitcoin almost two years earlier, so now Jacob Melin had a new house, a new truck, a new consulting business and a line of people coming into his office, trying to become wealthy as quickly as he had. One person said he expected to use a modest investment to “retire in 12 to 18 months.” Another said he wanted to use the proceeds to start a business. And a father of two talked about paying off his own student loans and buying several acres of land — all the things he did not see a chance to do with his income as a software salesman.

The most important economic contribution of blockchain might be that it shifts actual marketplaces closer to the economic abstraction of a market. Obversely, this might also become blockchain’s most important contribution to economics.