After The Social Web, Here Comes The Trust Web

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David Cohen

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Editor’s note: David Cohen is the founder and Managing Partner of Techstars, the #1 ranked Internet startup accelerator in the world. William Mougayar is an entrepreneur turned angel investor, founder of Startup Management, and currently raising his first fund.

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” – Buckminster Fuller

The bitcoin train is really made up of two revolutions in one: money and finance, based on the bitcoin protocol, and exploiting the “currency programmability” aspects; and decentralized applications, based on the blockchain’s distributed technology capabilities.

Both are grounded in similar roots (crypto-technology), but they have different branching. Both paths are creating disruptive, innovative and system-changing opportunities for startups, investors, consumers and business players. Both are joined at the hip, and that hip is the blockchain, the backbone of crypto-based transactions.

To fully understand the blockchain concept and the benefits of cryptography in computer science, we need to first understand the concept of “decentralized consensus,” a key tenet of the crypto-based computing revolution.

Decentralized consensus breaks the old paradigm of centralized consensus, i.e. when one central database used to rule transaction validity. A decentralized scheme (which the bitcoin protocol is based on) transfers authority and trust to a decentralized network and enables its nodes to continuously and sequentially record their transactions on a public “block,” creating a unique “chain” — the blockchain. Cryptography (via hash codes) is used to secure the authentication of the transaction source and removes the need for a central intermediary. The combination of cryptography and blockchain technology together ensures there is never a duplicate recording of the same transaction.

This degree of unbundling is enabling a new way of writing software, and it is a spark of innovation for money- and non-money-related decentralized applications.

There are different flavors of crypto-technology-related implementations. Some are based on the bitcoin blockchain itself and others on an independent decentralized one. Some are based on the bitcoin currency and others on alternative cryptocurrencies or branded tokens. All these various permutations are creating a rich ecosystem environment for cryptocurrency-based innovations.

To say that bitcoin and its sole blockchain hold a monopoly on the future of cryptocurrency-based implementations is like saying in 2006 that LinkedIn was the only social network needed when it was barely leading, and when Facebook, Twitter and many other social platforms were still babies.

We need to view what is happening today as a rich ecosystem that represents the best blend of computer and cryptography science, and not just as an ecosystem of bitcoin-centric technologies.

A future that relies only on bitcoin and its blockchain is simply not possible. The cat is already out of the bag, and innovation around cryptocurrency technologies is racing. At the center of it, trust is shifting from humans and central organizations to computers and decentralized organizations with an underlying decentralized consensus that governs them.

If the social web dominated the period of 2004-2014, the next 10 years might as well belong to the trust web.

What most people don’t realize is that bitcoin is just a protocol, and a pretty low-level one to start with. Any heavy lifting happens on top of it, just as TCP/IP is the Internet’s protocol and a pretty low-level one. The ecosystem in and around bitcoin is actually helping to enrich bitcoin, more than weaken it.

Companies and projects such as EthereumBlockstreamMaidsafeMastercoinCounterpartyStellarFactomCodius and NXT are innovating with new technologies, services and applications that are pushing or testing the limits of Satoshi Nakamoto’s original vision.

Today, the bitcoin landscape is still murky, but patterns are emerging. The picture isn’t totally clear, but here’s an inventory of where we are seeing some of the most exciting and promising entrepreneurial activity, both in the money and decentralized applications segments.

Money services

If you live in the Western world, or a relatively developed country, your banking system and currency are typically stable, and you’re probably happy with the services offered. But according to studies, half the world is unbanked and undocumented, and more than 4 billion people still don’t have Internet access.

To peer into the future of decentralized banking for the masses, look no further than the success of easypaisa in Pakistan and M-Pesa in Kenya. They are both SMS-based, cell phone-centric banking services that enjoy a wide user adoption for paying bills, transferring money, buying goods and services, and several other types of transactions. Easypaisa already holds more than a 50 percent market share in mobile financial transactions in Pakistan, and M-Pesa enjoys more than 70 percent market usage penetration in Kenya (higher than Facebook’s), and accounts for over 30 percent of that country’s GDP.

You might think that SMS-based transactions are a pretty simplistic scheme, but that may be exactly what’s needed: a return to simplicity. Bitcoin is all about that.

Microtransactions and money transfer

Bitcoin is perfect for micro-transactions. There is no reason why any web transaction under $10 shouldn’t be done using bitcoin. Credit cards or PayPal really have no place at the low-end of transaction value because transaction fees easily eat into the total transaction itself. Some of the early applications include tipping for a variety of reasons (appreciation, reward, donations, etc.) or as promotional gifts for marketing purposes. Some bloggers are even adding tipping buttons on their sites, perhaps signaling that tipping is the new “liking.”

On the higher end of money operations, money transfers are ideally suited for bitcoin’s native network structure, and the $400 billion-plus global remittance market is waiting to get disrupted, as bitcoin is lowering the costs of transmitting money by orders of magnitude in speed and simplicity. Further, we will soon become regular users of cryptocurrency wallets with built-in logic that will allow you to initiate money transfers or payments via programmatic conditions or rules that are based on smart contracts.

Money as content

One could argue that bitcoin will have a more significant impact than the Internet itself because the Internet didn’t have its own currency. The Internet was missing a native currency, and bitcoin is just that. We can think of bitcoin as an unbundled piece of content, just like content is unbundled all over the Internet; yet it appears well-integrated in websites, applications and services.

Bitcoin allows money to take a new meaning. If you think of this in evolutionary terms, we used to have content in printed newspapers and magazines, then the Internet came along, and allowed content to move aggressively to digital formats. Content that wanted to be free, became freed up on the Internet, and that created new forms of innovations on top of those models. With cryptocurrency, we can easily decouple the transaction logic from the money itself. Bitcoin will become gradually integrated and embedded right into the fabric of the Internet, and we will see it as native content itself.

Blockchain technology stack

There is a new technology topology that is forming for building applications on top of the bitcoin protocol.

Joel Monegro of USV has suggested a five-layer architecture that is blockchain-agnostic: miners and the blockchain; overlay networks; decentralized protocols; open source and commercial APIs; and applications. It is a good depiction of where we’re headed. Whether that exact topology or a variation of it is realized doesn’t matter a lot.

What matters more is that the blockchain concepts, and related technologies are sparking the imaginations of builders and developers who are innovating the form of services, protocols, infrastructure and applications that are decentralized. They are yielding increased consumer power, greater personal data ownership and reduced transaction costs, over the long term.

Digital rights and smart property

If you’re a creator or owner of digital assets, imagine if you could link these assets to the blockchain, binding your ownership (or rights) in irrevocable ways that cannot be undone unless you decide to transfer or sell them. And it’s all within your own control, not someone else’s.

In essence, you would be creating a “smart property,” which is an asset or thing that knows who owns it. The blockchain can be used as an auditable database linked to your cryptographic signature, and your smart property becomes linked to a unique digital fingerprint based on its content. Now imagine the portability, flexibility and discoverability aspects that accompany these capabilities, and that becomes a great lubricator for decentralized peer-to-peer trading and commerce.

Companies like Mine are enabling creators to establish a persistent link between their identity, reputation, a digital file and its meta-data using the blockchain as the proof of ownership. This will unleash new marketplace opportunities for trading these assets securely and efficiently.

Smart contracts based on “proof of work”

A smart contract is equivalent to a little program that you can entrust with money and rules around that money. The basic idea behind smart contracts is that a transaction’s contractual governance between two or more parties can be verified programmatically via the blockchain instead of via a central arbitrator, rule maker or gatekeeper.

Why depend on a central authority if two (or more) parties can agree between themselves after they bake the terms and implications of their agreement programmatically and conditionally? And do so with automatic money releases, while fulfilling services in a sequential manner or pay penalties, if not fulfilled?

At the heart of this undertaking is the key concept of “proof of work,” an integral part of Satoshi Nakamoto’s original vision for the blockchain’s role as the unequivocal authenticator of transactions.

The proof of work is a “right” to participate in the blockchain system. Expect a not-too-distant future where smart contracts based on proof of work and smart property will be dispensed and executed routinely. Smart contracts are potentially Ethereum’s sweet spot, as they represent its atomic unit at the code level, allowing anyone to write them, along with their own rules.

Decentralized peer-to-peer marketplaces

Decentralized peer-to-peer marketplaces are a stepped-up evolution from what we have today in the most successful marketplaces (e.g. Uber, eBay, Amazon). Actually, decentralized peer-to-peer marketplaces threaten to replace some of these existing players that operate semi-centralized markets.

In a decentralized peer-to-peer marketplace, anyone sells and anyone buys, while the center controls less but facilitates more. Trust, rules, identity, reputation and payment choices are embedded at the peer level. Participants arrive already trusted and decentrally acknowledged.

Examples of marketplaces and services to support them are being concocted by startups, such as La’zooz for transportation, or OpenBazaar for P2P trading. A decentralized P2P marketplace has a lot less friction at the center than traditional marketplaces. There are a lot more power and benefits at the edges than at the center. Here’s a more detailed description of the characteristics and behaviors of decentralized P2P marketplaces.

Cryptoequity

Not only does bitcoin allow companies to mint their own currencies and tie its appreciation to their success, it can also support the full life cycle of equity issuance, governance and trading.

Classical stock offerings could be replaced by a crypto-crowdfunding scheme. The meaning of “equity” is unbundled, and it is reconfigured on the blockchain, therefore potentially re-evaluating the legal nature of the corporation. This particular scenario is also related to the concept of distributed autonomous organizations (DAOs), as fully automated business entities that run by interacting with autonomous agents that contribute to its value appreciation by virtue of the collective intelligence and actions of its users.

This will allow organizations to have global IPOs from day one of their operations. Although the ramp-up can be slow, value is initially commensurate with the maturity of operations, and as users contribute more value to the decentralized operations, overall value and equity continue to increase. Companies like Swarm are enabling cryptoequity-in-a-box, along with sophisticated programmable governance based on smart contracts building blocks.

Decentralized identity

Your identity is yours and no one else’s. We keep our own passport (although it’s tied to a country) and use it to go anywhere, because it’s widely accepted, but we can hardly move or use our identity from one website to another.

Why not decentralize our identities (and even online reputations), along with their parameters, and own them ourselves? Why can’t we arrive at websites or web services with our own identities and move around that way? A decentralized identity opens the doors to a variety of interesting decentralized applications. Openname is working on decentralized identity as a building block protocol for decentralized applications.

A tech renaissance as the path forward

For bitcoin to succeed, we need to approach the new things that were not possible before. Copying the current system is only a starting point. It’s better to invent new things instead of fighting all things, and it’s easier to create new systems that circumvent the old ones.  Of course, bitcoin can replicate some of what is currently being done, but that’s not where most of the interesting developments are.

To see innovation, you need to look at the applications and usages inside new, pure bitcoin spaces, ones that are not constrained by the cumbersome legacies of the past.

Think about new spaces and businesses where you own your identity online, bind your digital assets to the blockchain, and accept payments or get paid in bitcoin or other cryptocurrency, without the need to have an existing bank account. Think about choosing the rules of doing business via smart contracts that protect you. Then attach yourself as a node onto a decentralized peer-to-peer marketplace in order to get discovered and do business.

That is the future of the trust web

Bitcoin’s economic success will not depend on a permission to transfer value to it from other financial assets. Bitcoin is its own currency and has its own technology stack, and it is creating its own wealth. Bitcoin’s native wealth creation will dwarf the current value we see from the transfer of fiat money into wallets (approximately $5 billion as of December 2014). Fiat transfers were just a starting point to boot it up.

That’s why going head-on against existing stakeholders and regulators is a futile exercise. The bitcoin economy growth will come from the creation and appreciation of its own value around its own ecosystem. For example, users will be paid in cryptocurrency in exchange for real services, decentralized apps members will add crypto value to decentralized organizations by virtue of their actions, and new crypto tokens will continue to be mined and linked to the creation of new business models built on top of blockchain protocols.

This is all starting to happen, and it is unstoppable. It’s more than a new paradigm. It’s a renaissance for technology, computer science and cryptography.

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