The Creation of Cryptostorage and its Wider Implications
You need content (digital information) stored on a computer before connecting several computers together to create a useful “Internet”, similarly, you need wealth (cryptostorage*) stored on a computer before connecting several computers together to create a monetary network or cryptocurrency
Preface
There are many articles and talks that explain what bitcoin is at different depths and usually give a historical context of what money is. I want to minimise that here, and focus on trying to connect some of the key dots that arise once you have a basic understanding of bitcoin.
The article is inspired by my own learning journey based on articles, talks, and posts in the public domain, especially those by Andreas Antonopoulos and Michael Saylor.
The article is composed of 3 parts:
- What is bitcoin?
- What is bitcoin useful for?
- What about the next bitcoin?
Part 1 — What is Bitcoin?
Let’s start to define what bitcoin is not trying to create.
Bitcoin is not trying to create an investment instrument that gives you 10x, 100x, etc.. the price phenomena (including its volatility) is a reflection of the adoption curve of people, rather than the actual objective, it is both a fortunate and unfortunate phenomena, and causes distraction.
Having defined what bitcoin is not, let’s explain what bitcoin is trying to do:
Bitcoin is a monetary network that enables you to store your wealth in a digital vault that you fully and solely control at all times.
At some level it’s like money in a cloud service, however this cloud service is not owned by any one company, bank, or nation. When you deposit money in your own “digital vault”, it cannot be lent out to anyone without your permission, and hence has no in-situ default risk as no external party needs to be entrusted.
In other words it is a bearer instrument that exists in the digital world.
The collection of these individually owned “digital vaults” are connected via a monetary network that is not controlled by anyone, i.e. you cannot add money (energy) into the network unless you have created value for someone in the real world and in return stored it in the network.
You cannot add negative energy (debt) in this system- hence wealth is always preserved over time. There is no room for promises (debt) in this network that can be written off or eased, there is only truth, ones and zeros, and hard-work.
You can also transfer your wealth across the internet to anyone you choose directly , similar to sending an email, and and hence transactions can be performed and settled 24 hours a day, 7 days a week, with extremely low cost, irrespective of the value of the transaction.
The natural question now is how is wealth “preserved” when the network’s value (bitcoin’s price) fluctuates significantly. This is a fair observation, and reflects the adoption curve. As more people use the network and inject money into it, it starts to stabilise.
Another question that comes up is how can you have a “store” before you have a “medium of exchange”, and the simple answer to that is the opposite is the prerequisite. Ancient currencies, such as gold, needed to demonstrate its scarcity and hence its store of value before it was deemed worthy of being exchanged within a community and beyond.
Today, the bitcoin monetary network is minuscule when compared to the world’s economy- it represents around 0.2% only.
The volatility is natural and healthy as it reflects organic adoption. The reason for the fluctuation is because the network is being charged with monetary energy (buyers) and drained by (sellers) at varying intensity and time. As the network grows in monetary energy or value and more people transact within the network’s own native “energy” instead of converting their wealth into and out of the network continuously, it’s stability will increase.
Part 2 — What is Bitcoin useful for?
I see a two part answer to this question outside of the ideological realm:
Firstly on the “asset” side. Everyone wants to at minimum protect their hard earned savings from eroding due to inflation. Meaning you want to be able to buy the same goods and services in the future with the same amount of money if possible. Those that have larger savings are able to invest in world markets, other assets, or start a business to grow their savings and generate income. But there are those that may not want to or cannot for various reasons, i.e. they have limited savings, don’t have the risk tolerance, or access to stable investable markets.
All this group of people wants is to protect their savings from inflation and have access to their money (liquidity) at all times.
Having understood that our fiat monetary system is inflationary. Can you create a product that holds your savings, without eroding in value, gives you access to it at all times (liquid), cannot be controlled by anyone (decentralized), doesn’t need to have a minimum balance or forms filled out, and be globally transferable?
Adopting a monetary experiment with serious investment, even if the idea is solid in principal, requires strong conviction. Consider at the same time fiat currency is only 50 years old and has started to fail.
Let’s look at this currency failure in detail. Banks offer savings accounts to store and protect your money. They are regulated, safe and secure. Unfortunately because of the increasing global debt, these savings account where in the past paid 6% interest or more, hardly offer any interest, and in real terms are negative yielding (refer to the chart below). Observation #1, today regardless of your income level, any sizeable cash savings in a bank account are losing value. Buying a house today costs a lot more than your parent’s generation, even if you adjust for wage growth. So how do you keep up?
So you look at government bonds, which are low-risk and liquid. Observation #2, not everyone has access to secure low-risk government bonds. Observation #3, both government bonds (even long-term grade AAA) and high-risk corporate bonds, offer practically zero interest rate or negative rates in some countries in real-terms. So even if you have wealth and are able to access these products, you are not any better off.
So now we are looking for a place to park our money that is ‘low-risk’ but can still give some positive return or at least not go negative in the future. What can we do other than taking on more risk, i.e. avoiding the stock market or business ventures? The key point is we are not trying to make 2x, 5x, or 10x, we just want to hold our savings, protect against inflation and access the money quickly- nothing else, the good ‘ole 3% savings account. You soon realise there is no option, you are being forced to lend your money and take risk in an attempt to save your wealth.
Enter bitcoin, a cryptostorage or a cryptoasset born to help solve this problem. At a basic level, bitcoin is an asset class that is finite (scarce) in supply, transparent (auditable), easily converted (liquid), and frictionless (transferable with minimal cost).
You have 2 immediate questions, what about gold and why can’t someone else create another bitcoin?
There are many articles that compare the value proposition of bitcoin vs. gold , so I will avoid discussing this in length, but I will highlight one key area of difference.The alignment structure in these two assets are fundamentally different. Gold miners’ business activities increase their revenue but dilute your wealth- whereas in bitcoin, the miners’ activity preserves your wealth by securing the network.
Some have even said gold is a physical approximation to bitcoin.
As to what about a bitcoin competitor, if you are sold on the above merits, this then becomes the most important question, and will be addressed in Part 3. Before we reach that point though, we need to build a solid case for what cryptostorage is useful for. And so:
Secondly on the answer to “What is Bitcoin useful for?” is recognizing the need for a new financial infrastructure to match our evolving society and economy. As society, information, and job functions are becoming increasingly more digital, digitization enables both automation and fragmentation.
Information and workflows have gotten increasingly digitized which has enabled more automation, i.e. a computers are performing tasks that would have required a human in the past. We have seen this in factories and e-government services for example.
Digital platforms have also replaced physical stores, and because of their ability to scale and reach a massive amount of people with little cost, this lead to a better customer experience in terms of prices and shopping convenience. At the same time these dominant platforms wiped out small businesses as they were unable to compete on neither price, convenience, nor customer support.
These digital platforms grew in size and became mega-cap companies, and started becoming more vertically integrated to monetize as many line items of their own P&L as possible, turning cost lines into revenue streams. To ensure they maintain their edge and innovation they also started to look at horizontal integration. Over time this massive multi-dimensional integration made them bloated. As a result, due to their massive size, corporate complacency developed, innovation lagged, and they caught they eye of regulators because of their business practices and market dominance.
The next step was for either a disgruntled employee in a mega-cap or an entrepreneur looking from the outside, to figure out new and innovative ways to disrupt and compete with them. They did this by fragmenting the value chain within the mega-cap. The entrepreneur found a way of making the mega-cap’s internal transaction costs even cheaper, and offered that as a service. Suddenly, the mega-cap started to unravel and needed to re-focus on its core identity. As we have seen recently and overtime with divestitures and spin-offs. This recent example is telling.
To further illustrate the above from an experience many will be able to relate to is to compare your holiday planning experience 20 years ago to today. Where in the past you had to walk into a travel agent’s office, had no idea about market prices or hotel options and reviews, and instead relied on a either the agent’s recommendation or word-of-mouth references that may or not reflect reality or your particular taste. By making pricing and stay reviews readily available online, we made better and more informed decisions as it drove service providers to provide better rates and services.
Initially these online platforms built critical mass and improved the utilization ratios of well established businesses that enlisted themselves (this was the automation workflow of matching buyers and sellers).
The next step was to capture the untapped market that had idle resources and could appeal in their unique ways to a different set of customers. And so landlords became hotels and car owners became taxis via the various online sharing platforms.
This disruption wasn’t easy to establish as these new “sellers” had unknown reputations and the ability to establish trust between the sellers and buyers required a form of electronic governance. Businesses have known reputations, operating standards, and are easier to hold accountable due to established regulation they need to abide by. By allowing people to transact directly with one another, an effective governance system had to be built, to provide physical and financial safety to both parties. Safety was achieved through background check, reputation scores, location tracking, and ultimately controlling when and how much someone got paid. In order for this new disruption to be successful it had to rely on a trusted central party to be the information provider and final arbiter.
Peer-to-peer commerce started emerging and enabled people to transact more intimately, however one area remain untouched, the payment settlement layer, which is the heart of this section.
This new economy emerged due to disintermediation, i.e. removing as many people or layers as possible between someone that wants something (a buyer) and someone that can provide it (a seller), the foundation of a peer-to-peer economy.
The move to a peer-to-peer economy is not a new economy, rather we are going back in time, when all transactions were personal. The fundamental difference in this new peer-to-peer economy is the ability to become more visible (reaching people globally) and being competitive by leveraging technology across the value chain. This new phenomena becomes even more important as our emphasis shifts from wanting “physical assets” to “digital assets” (as we have seen in the music and print industry for example).
In this digital world, every digital representation of the physical world becomes a revenue stream, including yourself. Perhaps a dark thought, and outside the scope of this article.
As we digitize our world with the noble goal of improving the quality of life for everyone, the concept of Internet of Things (IoT), starts to emerge. Machines have started to talk to each other without requiring input from you and making decisions on your behalf. These daily micro-decisions, performed on your behalf invisibly in the background, are slowly becoming services. For example, adjusting your home’s thermostat and turning your oven on when you are leaving work based on your calendar or GPS settings.
The impact is equally great on the business world, where central computers have started to mange inventory orders, work schedules, and security for a warehousing business.
With less human presence required and machines performing more of the mundane workflows, the ability to operate and serve people around the clock, and around the world becomes easier.
Our “Always on, I want it to now” economy, whether a desirable thing or not, all of sudden takes on a new level once we are able to crack the payment settlement problem.
How much of this sounds familiar to you:
- I’m sorry we don’t accept cards — cash only
- I’m sorry we have a minimum $ for cards or you need to cover the 3% that our bank charges us
- Sorry we don’t accept this bank network, or foreign cards
- It’s after hours or the weekend, we will process your payment the following week and deliver your product afterwards
- It’s 5% Forex fees even though we are a major bank holding both currencies you went to convert from
- We’ll give you 0.1% interest for your deposit and we’ll only charge you 20% financing fee for your credit card purchases
The above are all symptoms of an outdated financial system that due to various factors, became complacent, uninnovative , and exploitative. It is no surprise that such system does not integrate well with the digital economy, but not only because of its business practices but also due to the very currency or money it relies upon.
Some will point to crowd funding or fintech as disrupting the existing financial system, and while this may be true to some extent, it still co-integrates within the same financial system, which means the inherent inefficiencies and conflict of interests remain.
Free markets are essential to allow innovation to thrive, it is only because of these micro-disruptions that banks started to improve their services and lower their fees recently, however our new economy needs a “new money”.
Our new economy needs truly digital money- meaning, fast, cheap, tiny, risk-free, and programmable.
Fast and cheap are easy to understand. Tiny means the ability to transact at fractions of a penny, for micro-payments that can enable paying for per consumption use on IoT systems and serve as an alternative revenue model for content providers which will be discussed below. Risk-free means when you get “paid” you truly own this payment, i.e. it cannot be reversed or seized by anyone. Finally, the “programmable” feature is necessary in order to be able to have “payment conditions” in case reversing the payment partially or fully is needed in a particular transaction as agreed by the transacting parties. The programmability aspect is crucial if are are trying to keep this new financial system as decentralized as possible. Fewer intermediaries means better cost, security, and governance for all.
And so if we tie the above concepts with Part 1 of the article, it starts to be clear why cryptostorage such as bitcoin, a pristine collateral asset, with properties of robustness, security, and decentralization, becomes the ideal building block of this new financial system globally. This building block is as neutral and organic as we can get.
While some have criticised the settlement time of the bitcoin network, we need to consider that this 1 hour settlement time is considered “true and final settlement”, whereas you may be able to swipe your card at a shop and “pay” on the spot. In fact, the intermediary networks have not actually settled your account until days later, similar to a wire transfer. And so, the payment layer can be built on top of bitcoin, and in fact is already built, known as the lightning network.
In a world where the financial system becomes more decentralized and adopts neutral digital money, new products and services also start to emerge that are disruptive to mega-cap companies- and hence even more fragmentation is created.
In our digital lives, most of us read emails, share photos, shop, blog, message, and create content on identical platforms. These platforms are generally free because they are able to generate their core revenue from ads, sponsors, and selling your personal information. With such a big and powerful ecosystem of information, influence, and revenue, external public pressure from both government bodies and private sponsors starts to build to regulate certain objectionable content and behaviour. The recent trend has seen users de-platformed for expressing or promoting certain views points, thereby choking their ability to earn a living.
And so, we find ourselves wanting a neutral online platform where we can exchange ideas and content and generate income without relying on a platform-provider that can decide at their will whether you are allowed to be in or out. Decentralized content sharing platforms have started to emerge, but the ability to generate income without relying on third parties such as sponsors and ads limits adoption. By decentralizing finance, this moves us to true peer-to-peer commerce. This can be extremely empowering for small business owners and also makes it more difficult to curtail hate platforms.
If we focus on the positive, these liberated platforms, allow each part of the value chain to be compartmentalized and made ultra-efficient and cheap. For example, the “web-store”, “customer-service”, “payments”, “logistics”, “administration” chains.
Hence if you want to sell certain products online, you can give your users, that look and feel of a mega-cap online store by utilising some of the existing web apps to create a slick interface. Online help bots or outsourced customer service centres provide “customer-service”. Digital wallets take care of “payments” and smart contracts can handle the bulk of “administration”.
If you are a content creator, i.e. blogger or podcaster, you are able to exchange ideas and content on a decentralized platform and charge for your work via micro-payments directly from your audience. That is, you can choose to charge 1 cent or fractions of a cent per click, view, or second of consumption. This frees you from relying on adds or sponsors and connects you directly with your audience, and at the same time, removes any payment processing commissions you would have paid.
In this new system, you solve many issues big-tech companies have been creating, while obviously exacerbating others. There is a relevant ethical debate needed on how some of the benefits can also lead to amplified echo chambers, greater radicalisation, but this topic is outside this article’s scope.
And in case you do not believe big-tech will be disrupted, this move to “protocols, not platforms”, as Mike Masnick is quoted in this article, is not speculation, rather clear conviction by some in the tech industry of how to solve the many challenges that come with being a powerful content provider. This is not to say they will be out of business. Quite the contrary, they will reinvent themselves to monetize their protocols, providing digital arbitration, and other value added services by integrating data to provide behavioural insights should users opt-in.
And so, we conclude this part by re-capping the opening statement:
You need content (digital information) stored on a computer before connecting several computers together to create a useful “Internet”, similarly, you need wealth (cryptostorage) stored on a computer before connecting several computers together to create a monetary network or cryptocurrency
In Part 3 of this article we will answer the crucial question of what about the “next Bitcoin” and how that may unfold.
Notes & Signature
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