Monthly Archives: February 2016

Bitcoin’s not broken

Cryptocurrency_Mining_Farm

A lot of high profile Bitcoin people are getting their knickers in a knot as they’re starting to realise that they don’t have any real control over Bitcoin and how it evolves.

As Wired points out,1)Cade Metz (2016/02/11), The Schism Over Bitcoin is How Bitcoin is Supposed to Work, TechCrunch. the current schism is more akin to a vote than anything else, and it is working as designed.

Bitcoin’s ledger is protected by an indirect consensus process. Rather than voting on which ledger is correct, with Bitcoin we prefer the ledger (the version of the truth) that has contains the most “embedded work”, as this should be the ledger with the support of the largest proportion of the mining community.

Bitcoin’s definition – its consensus process (protocol in geek, the whole transaction definition, proof-of-work thing) – is protected via a similar mechanism. Miners are free to adopt any version of the consensus process they chose; big blocks, small blocks, etc. We should also remember that there is no restriction on who can offer up a version; they don’t need to be from the “core team” or other blessed group of individuals.

Consequently Bitcoin governance – just like the state of the ledger – is based on the consensus of the miners. This is quite different from the governance models we’re used to in industry or government. It’s also a long way from the traditional open source world.

What we’re seeing is a bunch of high profile individuals getting in knots as they realise that they don’t have any real control over Bitcoin, which is working as designed.

Image source: Marco Krohn.

References   [ + ]

1. Cade Metz (2016/02/11), The Schism Over Bitcoin is How Bitcoin is Supposed to Work, TechCrunch.

The Future of Exchanging Value: Cryptocurrencies and the trust economy

FoEV2_coverOur latest piece at Centre for the Edge is out: The Future of Exchanging Value.

This report started life as a followup to a report we published in 2012. As we say in the current report:

Our findings in that report centred on the realisation that we were reaching the end of the initial build-out
of a digital payments infrastructure. The task of provisioning the infrastructure merchants require to accept real-time digital payments, or for two individuals to settle a debt, was largely complete. Consequently, our focus had shifted to streamlining the buying journey – from the pieces and parts to the whole.

Our key point then was that the future of exchanging value would be shaped by social forces – how payments fit into the end-to-end consumer experience – rather than the technological challenge of deploying yet-another generation of payments solutions.

This new report, which was intended to be a short update, when in an entirely different and much more interesting direction.

Our key insight this time is that we’re all thinking about money the wrong way.

It’s common to assume that we use money (cash, currency…) to build trust relationships. This assumes that our adoption of money stems from the coincidence of wants. I need shoes. You have shoes. You want a fish. I have a chicken. We use money to bridge the gap.

The problem is that this assumption is incorrect. As David Graeber points out in Debt: The First 5,000 Years, debt came before barter and the coincidence of wants. Most folk in antiquity didn’t need money. They knew everyone they interacted with, and could rely on the community to enforce the collection of a debt if need be. Money’s first use was as a measure of value, typically to help calculate damages in a criminal or civil manner. Communities had carefully drawn up lists to capture exactly what you owed, in a convenient currency, someone if you destroyed their house, stole their food. In Somalia, for example, they use camels (commodity money). The other uses of money – as a medium of exchange and store of value – came later.

This is a fascinating fact, is it points out that we have the consumer-merchant relationship backward. We’re focusing on the transaction when we should be focusing on the relationship. The future of payments is not micropayments and tap-and-go. Indeed, the future of payments might be to use a loyalty scheme (a complimentary currency) to anchor the relationship and then move the transactions from the centre of the relationship to the edge. This ties is cultural preferences that we have, and which equate money and transactions as “dirty”. The future of payments might be not to have payments at all.

Bitcoin and the whole cryptocurrency thing is influenced by this too. There’s a huge amount of noise in this area at the moment, and everyone one is waiting for the killer app that will drive Bitcoin (or another cryptocurrency) into mass adoption. If, however, you view Bitcoin adoption as a cultural problem, rather than the search for a killer app, then you end up at the conclusion that no cryptocurrency will become much more than a large niche. The best equivalent in the current environment that we’re all familiar with would be a large frequent flyer scheme. It’s hard to scale trust, even with technology support, and these frequent flyer schemes seem to up near a nature limit.

There is one use case for currencies growing larger, though: when a sovereign nation mandates that you pay taxes in a specific currency. This trick is behind all the major currencies, and was used by the colonial powers to pull conquered land into their monetary system. Acquire currency to pay tax, or we send the bruisers around.

We conclude in the report that the best analogy for cryptocurrencies is rum and cigarettes. Rum was used in Australia’s early days when there wasn’t enough government issued currency to go around. Cigarettes were used by prisoners or war as they had few other options.

We can expect cryptocurrencies to see some adoption in countries where the population doesn’t trust – or can’t access – the national currency. Argentina springs to mind. Cryptocurrencies are mush less useful in other countries with mature and stable economies.

A similar argument can be made against cryptocurrencies as internal reserve currencies. (And that argument is in the report.)

There’s a lot more in the report, and I’ve been told that it’s a bit of a ripping yard. Go grab a copy and read it.

The problem with platforms in the sharing economy

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I have a new post up on the Deloitte Strategy blog.It’s the result of a chat I was having the other day with an economist colleague who opined that “platforms are an essential part of the sharing economy”.

As I point out in the post:

These platforms might be sufficient to kick-start the sharing economy, but they’re not necessary for its long term survival. There are alternative approaches to creating sharing economy solutions that do not rely on a centralised platform.

Platforms solve what we might call the discovery problem. When we’re creating a market it needs a mechanism for buyers and sellers to discover each other.

Rendezvous – where buyers and sellers meet at a common location – is probably the most common solution to discover. It’s also the one that firms prefer as it’s the easiest to monetise.

As I point out later in the post:

The recent emergence of blockchain – a distributed ledger solution – from the shadow of Bitcoin might be a sign that something has changed in the environment, something that is tipping the advantage away from centralised solutions and toward distributed ones.

This could be a big deal, as it blows a rather large hole in the business models of the sharing economy firms.

Check out the post and see the whole story.