This was definitely a cryptocurrency and blockchain week. Headlines boomed out that Bitcoin had fallen below $30,000. CNBC reported real-time as Elon Musk, Jack Dorsey, Cathie Wood debated (but actually not too much) the future of the world as it pertains to Bitcoin and other crypto-assets. Fred Wilson responded to SEC Commissioner Hester Pierce suggesting that stablecoins are preferable to Central Bank Digital Currencies by agreeing with him, and by so doing implying nation-states were not best placed to “print” money, and directly saying that competition over who prints money would be a good thing for the future of money. And in the same week, my old friend Mike Arrington revealed his next act - having moved to Miami - will be to double down on the crypto industry and invest Arrington Capital’s new fund(s) in the sector.
The short version (I encourage you to read the longer one) is that innovation in the blockchain has moved to what is called “level 2” applications. Basically, things are built on top of “level 1” blockchains. The reason for this is that many have deemed level 1 blockchains to be inherently unscalable from the point of view of the speed of transactions even though they scale in terms of size. That has led innovation to happen in the layer above. But, the paper argues, that comes at a price. The price is a re-centralization of the technology, creating the need to trust third parties when the entire point of the blockchain is to remove trust as a necessity.
Enter Algorand. it is a new level 1 blockchain, as is Bitcoin for example, and Ethereum. It claims to solve much of the speed problem without compromising a fully decentralized and trustless architecture. It also does so with a model that rewards holders of its token by issuing regular rewards for holding.
So why is the research paper interesting. Because I think it is 100% correct in pointing to the centralizing tendencies of blockchain innovation, recreating the architecture of the current generation of the internet where we end up with large powerful corporations that “own” key pieces of infrastructure. Central Government if you will.
The idea that technology can become fully decentralized, with no need to trust participants is also central to Fred Wilson’s reaction to the SEC Commissioner favoring private stablecoins to central government-issued digital currencies. A stable currency is really important in a fully digital money system. Volatility in this or that token can be avoided if there is a stable alternative to swap into at key moments. Tether (USDT) and USDC are both private stablecoins. Tether is valued at $70 billion and USDC at $26 billion. Both are global and readily available to all digital wallets. They can be cashed out for government currency in most of the world. By allowing the global network to use these underlying assets as stable intermediaries between other assets, the ability to store and move value is guaranteed. There is no government role needed.
So when Jack Dorsey says that Bitcoin can bring world peace (actually he didn’t really say that, but he thinks the potential is there) he was really saying that humans can make the world work without governance or the need to trust those who govern. We can simply get on with life because the underlying network simply works.
And the underlying network now brings together a global ability to earn, spend, transact, move or store value, without ever needing to deal with governance.
So Mr. Arrington. I think you and your team are right. The future is decentralized and governed without governments. It will not happen overnight, or without governments of all kinds resisting, but it will happen
For my regular readers…this may be a little in the weeds. But it is very important you out collective futures. By comparison Elon Musk’s rantings this week are pretty insignificant.