Chapter 8: Jack-of-All-Trades?

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[Note: below is chapter 8 to Great Chain of Numbers]

Can Bitcoin do everything?  I spoke with Adam Levine, editor-in-chief of Let’s Talk Bitcoin about the future of altcoins and DACP.1 According to Levine, “unfortunately many crypto proponents are conflating cryptocurrencies (an ecosystem of protocols) with Bitcoin (the protocol) and bitcoin (the token) – yes, bitcoin is a cryptocurrency but not all cryptocurrencies will necessarily be (a) bitcoin. They are not mutually exclusive and are all part of the larger cryptocurrency ecosystem.  Another way to think of it is Bitcoin is a specific reference implementation of Cryptocurrency but not the definitive technology as it does not solve all the problems, otherwise nobody would care about Ethereum, Mastercoin or Counterparty.  Thus it would be imprecise to just say Bitcoin is the only real cryptocurrency because the altprotocols and “2.0” projects all learned from limitations of Bitcoin; borrowing lessons and ideas but not necessarily the code. And as a consequence, immutable algorithms employed by these improved DACPs and cryptoprotocols empower users to choose their own parameters, boundaries and even create voluntary associations.”

Levine also sees Bitcoin as a type of highway and the other platforms and protocols as off-ramps.  Yet, in time other protocols could also become highways and thus an interconnected series of decentralized, encrypted highways would transmit and track value globally in a frictionless manner.  As he says, “it is an open source ecosystem filled with numerous competitive platforms.  There will probably be a marketshare ‘winner’ in a few years that is bigger than everybody else and at that point, all the other participants will retarget their DAC development at the new platform.  Perhaps they will fork the winner and start from there.”

While not everyone agreed with method or path, the one common theme from everyone who provided insights to this guide was: do not be afraid to take risks. Nearly each person I spoke with had started a company in the past and experienced failure first hand.  Do not let that stop you from trying a different approach. Learn from your mistakes and be open to changes.  This might sound cliché but the world has never seen anything like a cryptoledger before and incumbent institutions are now paying attention.  In fact, in its latest 10-K filing with the Securities and Exchange Commission (SEC), eBay named both BitPay and Coinbase as potential competitors to PayPal.2 Similarly in January 2014 Wells Fargo held a meeting on how to assess and ascertain the legal and competitive issues that cryptocurrencies create.3

While the Bitcoin protocol has grown immensely in the past five years, it is still quite young in terms of market penetration.  At the time of this writing, the market cap for bitcoins (all 12.4 million that have been mined) is roughly $7 billion.  For comparison, according to the World Gold Council, as of December 2n 2013, there is roughly $6.8 trillion in above ground gold.4 And global e-commerce sales topped a collective $1 trillion in 2012.5 While there has been a concerted focus on the token value of bitcoins this misses the forest for the trees.  The potential market cap for all trustless asset management is the same sum total of known assets which is several orders in magnitude larger; the key difference is how they are managed and transferred.  Some assets, such as deeds and collateralized loans, are easier to encode as a smart contract; others may be more difficult.  Similarly, existing blockchains are limited in terms of what secondary attributes they can store (e.g., hashes of contracts) and, due to their confirmation periods, are not ideal for transmitting securities in an HFT manner.6 Thus cryptoprotocols today, should be seen as works in progress with enormous potential.

With the knowledge of the previous chapters, the question that decision makers, executives and business development managers should ask is, what can cryptoledgers or smart contracts solve for large organizations with established networks, retail operations, or mobile assets?   Time-stamping and HR automation have already been discussed, as have customer-reward programs like frequent-flier miles, so what about monitoring car fleets?  Or perhaps Bitcoin is not needed to perform every function; perhaps it will serve as a bridge for some, but not all virtual exchanges.

Niche payment processing platform

At this time, while it is very good for remittances, Bitcoin is not a competitive payment system for many parts of the world.  It can be used, but it is not ideal.  This is because the confirmation rate of its currency (bitcoin) is too slow and relatively expensive – the transactions per second has lagged behind the price.  Similarly the protocol is less than optimal in most transactional settings because it is cumbersome, not Turing-complete, and not intended for this specific purpose, preventing developers from building transactional and contract systems, services and applications on top of it.  As a consequence, its usability is still extremely limited for most mainstream payments such as point-of-sale; and software and infrastructure must be deployed to take it to a network capacity of 100s or 1000s of transactions per second instead of the current 7 per second.

This situation may be temporary and could take a few years to resolve – and at that point perhaps we will see payment adoption take off but this would require substantial changes to the protocol.  For example, perhaps by that time blockchain pruning (SPV) will be implemented to eliminate all spent outputs from the blockchain (shrinking it substantially).7

David Evans, a law professor at the University of Chicago, recently published a payment platform comparison between M-PESA (in red) and Bitcoin (in blue).8 Below is one figure reprinted with permission: mobile payments comparison

As Evans points out in his article, M-PESA was first introduced in Kenya in mid-2007 whereas Bitcoin was launched in January 2009.  Yet as I mentioned above in chapter 6, M-PESA is so widely used in Kenya that roughly 43% of its annual GDP is handled through this mobile payment system, the same obviously has not occurred with Bitcoin yet (perhaps it could with other systems such as NXT or Ripple).910

It should be noted that the direct comparison is not entirely apples-to-apples either as the Bitcoin transactions in this chart only include on-chain transactions.11 Coinbase and Circle use off-chain wallets which permit users to buy, sell and trade bitcoins (including micropayments) instantly that would otherwise take tens of minutes to confirm via an on-block chain implementation.  An off-blockchain solution also allows users to trade below the dust limit (roughly 5460 satoshis) which is an artificial limit implemented by the developers several years ago to prevent spam from propagating the network (e.g., a malicious user could send out millions of 1 satoshi, each of which needs to be added to a block, thus taking up time and resources).  BTC-e takes this off-chain approach a step further by allowing users to build bots that interact with its API, enabling high-frequency trading.  None of this is possible on-chain and thus these types of transactions are not represented in the image above.

But Evans is right to bring this criticism up and it is an issue that has motivated other developers to build these ‘next generation’ platforms described in chapter 3.  For example, Bitcoin currently has a hardcoded block size of 1 MB, or 7 transactions per second.  In contrast, Visa’s payment processing centers handle on average of 2,500 transactions per second and are built to process a surge of up to 10,000 to 20,000 per second.12 Other platforms such as Ripple have a purposefully more robust payments system, in the case of Ripple its current setup, while security conscious, can handle 100 transactions per second but it is designed to handle at least 1,000 transactions per second as well.

Again, this may not be an issue in developed countries, where users have easy-access to Bitcoin wallets (both web and mobile based).  And because of the relatively large fees described in Chapter 6, cross-border remittances has been one of the ‘killer’ apps for Bitcoin and will remain so into the future.  In fact, despite the fact that it takes 10 minutes for one confirmation, it is still quicker than other existing remittance processes such as ACH which can take three days to clear.13

But as an RTGS, a real time gross settlement service, where transactions clear near instantaneously, it cannot compete at the same level as credit cards or M-PESA.14 This is an issue that potential entrepreneurs should keep in mind.  In fact, while there are certain days that $50-$100 million worth of bitcoins are processed along the network, that is about as much as MasterCard and Visa process in a few minutes.15 For comparison, in 2013, MasterCard and Visa processed a combined $7.4 trillion in purchases.  Together with American Express and Discover, these four companies generated $61.3 billion in revenue during the same period.  While credit card companies like Visa can make the clearance of payments even offline (they download the blacklist on terminals) and M-PESA is quick and easy via SMS, the slower confirmations are a challenge for Bitcoin as it makes its way into the mobile payments space.

Usage rates

Readers may be wondering just how many users actually use Bitcoin or other cryptocurrencies.  Because of the decentralized nature, it is a difficult answer to actually provide.   In addition, it is difficult to differentiate between those who have exchanged a fraction of a bitcoin at any time and those who are actively using bitcoins today.  For instance, according to Bitcoin Pulse, the number of cumulative individual wallet downloads hosted at Sourceforge is 5 million; yet as shown below, this is not the only type of wallet users have access to.16 Other metrics, such as looking at popular social media sites like reddit or Bitcointalk are also inconclusive because while there may be 110,000 redditors subscribed to the Bitcoin channel, many of those are likely sock puppets.   In addition, readers should keep in mind that a user of bitcoin can be defined as a user even if the amount they transmitted is a little as 1 satoshi (0.00000001 bitcoin) or as large as 1 million bitcoins.

While roughly 1.1 million Bitcoin addresses hold 99.99% of all bitcoins (as of block 285,000), this is not the equivalent to saying only 1.1 million people hold all the mined bitcoins.17 As of this writing, 107 addresses hold 21.76% of all mined bitcoins.  Again, this does not necessarily mean that only 107 individuals own roughly one-fifth of all bitcoins.  For example, some of these addresses belong to large exchanges and web-based wallet services such as Coinbase and BitStamp.  Because these customer wallets are off-chain it is impossible as an outsider to know exactly how many people actually own and use bitcoins behind this wall.  Coinbase now has over 1 million customer wallets and it is unknown how many of these users actively trade and use bitcoins with other internal services.

Yet, there is likely a liberal upper bound estimate of roughly 10 million users on all platforms in the ecosystem today.  There are two ways to derive this number, the first is from the fact that there are roughly 10 large web-based exchanges.  If each of these has one million users, which they likely do not, then that is approximately 10 million users.

Another way to derive the 10 million is through the limitations of using microtransactions directly through the blockchain.  Because of anti-spam provisions know as the dust limit, users currently cannot send less than 5460 satoshis on the blockchain directly, otherwise that transaction is not incorporated into a block.  For users in developing countries looking to conduct in commerce and or even remit with bitcoins, there are few formal exchanges based in these regions.  Thus they will likely use on-chain wallets and if they use on-chain wallets their transactions will be limited to sending bitcoin values above this dust limit.  As of this writing 26.39 million addresses (95.27% of all on-chain addresses) hold bitcoin balances between 0.0 and 0.001 bitcoins.  However, it is unknown how many of these addresses are actual active users or how these are abandoned addresses (e.g., forgotten about, lost private key, used as a temporary go-between address, mining transaction fees, unclaimed reddit tips, etc.).   Usage rates of many other cryptocurrencies follows similar patterns.  This dearth of fiat-to-cryptocurrency exchange in emerging markets presents a business and educational opportunity for entrepreneurs such as bitcoin ATM providers as discussed later in this chapter.

Decentralization for decentralization’s sake

In conducting the research for this manuscript, I spoke with several investors who explained that using crypto for crypto’s sake or decentralization for decentralization’s sake is not a particularly efficient or effective business or even developmental model.  In fact, centralization of information and assets can and is oftentimes easier to manage in most industries.  Just because Bob stores data in a centrally managed Amazon cloud server, does not make his enterprise any less effective.  In fact, the code probably runs much quicker due to how AWS can scale (e.g., less distance and therefore less lag between computing nodes).18 Furthermore, just because some system can be decentralized, does not mean a business owner should do so.  In fact, irrespective of cryptocurrencies’ long-term potential, a total-cost-of-ownership (TCO) analysis should always be done by anyone wanting to move from one infrastructure to another.  Perhaps the opportunity costs of keeping the existing system are less than switching and managing another.

Similarly, others have explained to me that making a product easy-to-use should not be the penultimate goal either; rather, developers and entrepreneurs should instead answer these questions: What problem does this solve?  What need does this satiate?  Why should others use it?   Bob could extol the virtues of cryptocurrencies to his relatives and convince them to purchase bitcoins or dogecoin as a speculative investment, but what would they use it for in their daily life?  How does it make their life any better or easier?  Just because you can decentralize, should you?  These are the kind of questions that start-ups in this space need to answer.

This insight could save many people a lot of headaches in the future.  Instead of forking code and reinventing the wheel, several sources I spoke with think developers should learn from the mistakes of the open-source community fifteen years ago.  Where there were endless Linux distributions being rolled out and semi-funded, each had technical advantages, yet few could convincingly provide a solution to specific problems and garner mass market appeal.  And ultimately after years of consolidation and market purges, the most popular Linux-based end-user package was not Ubuntu or Fedora, but Android – which simultaneously satiated customer demand and solved needs in an easy-to-access manner.19 Thus, when looking upon potential investments, this investor will often ask startups in this space why do you need a decentralized system running in the first place.  What is the burning need?  In cases such as maintaining IT infrastructure they could in fact create higher costs or produce negligible gains.20

One investor explained to me that while critics are right to point out that there has thus far been a limited buy-in of mindshare of these new technologies, they should also acknowledge that existing system today replaced other systems and so on.  Whereas previously brokers traded on the exchange floor, electronic traders were viewed as outsiders and the floor traders were the insiders.  That role has reversed in a matter of decades.  Like the horse-and-buggy before it, any new disruptive technology will seriously impact the landscape creating winners and losers.  What entrepreneurs need to try and figure out is how they can position their firm to get on the winning side.  Maybe it is blockchains, maybe it is consensus ledgers, maybe it is something else entirely.21

Cost benefit analysis of decentralizing

Too much of a good thing, however, can be problematic.  While a lightweight proof-of-stake or Ripple-based cryptoledger could be used internally by corporates to replace auditors and accountants (e.g., reducing administrative overhead, electrical and equipment costs), an intranet-based proof-of-work cryptoledger – while possibly being able to achieve that objective – may be a solution looking for a problem.

Unlike the Internet, intranets are based on centralized network controls where all actors are known and all actors are already constantly monitored and there is trust.  Because trust is enforced by administrative oversight, the problem of tracking financial and other assets is suitably addressed for normal commerce by existing technology.

Our example begins in the future, where cryptoledgers and smart contracts provide accounting and auditing but also utilize tokens to track and manage inventory and logistics internally.  With this technology, inventory systems that could be compromised and abused might instead be replaced with cryptoledgers.  If Bob owns a large media store, he could manage and track all of the books with embedded RFID tags; instead of building and trying to maintain a relatively costly proof-of-work infrastructure (e.g. hardware expenditures, electricity), because it could conceivably run on a smartphone, a proof-of-stake ledger could easily be maintained, powered and integrated within cash registers, point-of-sale terminals and nearly any intranet-connected devices.  The cryptoledger could itself be managed by a DAO which then connects it to a larger corporate VPN to franchise locations and vendors in the supply chain, each of which have their own ledger and so forth.

Again, the token itself is unimportant from the perspective of human agents; it is not used for some value-based exchanges but for internal bookkeeping and rationing.  In all likelihood, if a cryptoledger is used internally, the tokens would all be premined.  Another example of where the technology might be applied would be automobile dealerships and car rental facilities.  If Alice runs a Hertz franchise she could install a proplet (a MEMS device that can interact with smart contracts and cryptotokens), with which she could control the operation of a vehicle based on the lease agreements – including reverting control of the vehicle to a new owner all via a cryptoledger. This kind of functionality extends beyond automating the movement of information – individuals can already buy, sell and rent vehicles over their mobile, but must use trusted 3rd parties and payment sites.

A cryptoledger, on the other hand, removes the necessity for 3rd party involvement.  For example, Hertz could implement an internal proof-of-stake ledger at each location, and a DAO would connect the ledger via a VPN to the parent company. Each car ignition would be fitted with a proplet that can communicate with the ledger via a cryptographic handoff (a token of some kind), and therefore any customer or owner could use smart contracts to pass ownership off to other approved individuals. Or, if it is a self-driving vehicle, it could start and drive to Alice’s home and drop her off at the office.  The ‘minting’ of tokens within the POS (or POW) ledger is not important as a store of value but again, is used to track and manage inventory in an unforgeable manner.

Consequently, neither Alice nor Bob are locked in within any specific vendor of cryptoledgers, as these systems are currently open-source.  Furthermore, because a DAO manages the edge of the network, they can work with decentralized exchanges that enable customers from any part of the globe to transfer one type of cryptocurrency for a cornucopia of tokens representing thousands of assets, thereby creating a frictionless environment for decentralized commerce.

But would the cost and unfamiliarity of adoption of cryptoledgers over existing technology which serves the same purpose be worth it? It is probable that for smaller businesses the opportunity cost – the new skill sets which employees would need to learn – might be prohibitively high, particularly given the dearth of software tools available for the technology. Some, however, see that businesses with sufficient scale might be employ cryptoledgers – sooner rather than later – for strategic applications of a capital-intensive nature, such as obtaining funding from the capital markets, as Preston Byrne suggests in chapter 2.  “A smart contract could be written which permits vehicle immobilisation as part of security enforcement, as Nick Szabo proposed,” Byrne says. “Depending on applicable local laws this could be provided as a security package for issuer SPVs. The example of Hertz is particularly instructive – while the company has embarked on whole-business securitisations in the past, this technology might improve the quality of the company’s collateral to a sufficient extent that future transactions could be asset-backed instead of being backed by all of the firm’s receivables, lowering its funding costs. In a broader automobile lending context such a system could be used by any lender to dramatically reduce servicing costs while providing considerably better loan-level data to prospective investors.”

Thus the opportunity costs, the seen and unseen of implementing and maintaining a decentralized cryptoledger should be taken into account.  Similarly, at some point traditional players could enter the market when cryptocurrency has enough traction and either build something themselves or try to buy the new established players.22 For example, if Coinbase continues to increase in popularity, perhaps Wells Fargo would absorb it.  While speculative, perhaps the upcoming launch of SecondMarket’s exchange, a New York-based platform, could be acquired down the road by JP Morgan or Chase.23

NGO use-cases

In an exchange with Petri Kajander, an entrepreneur and a senior fellow at The Cobden Centre, an economic think tank, he sees “a lot of parallels with the dotcom boom and also with the mobile boom.  They also started with basic protocol and infrastructure levels and built up from there to the more sophisticated services once the basic layers were settled and established.  It is sort of a similar story here.  You cannot aim too high at the beginning since the basic building blocks are still not in place.  Also, even though you might be anticipating the right services and needs – your timing might be off.  The end users are just not there yet.  The sweet spot might be still years away – even though the technical capabilities could be in place.  There is going to be a lot of trials-and-error, and huge amount of luck involved, for some.  The trick is to try and monetize throughout the journey.  For instance, the most boring applications may be the most profitable in the beginning; like a financial back office and corporate administrative solutions providing the biggest savings in the first phase.  Market participants should also be aware and cognizant of regulatory bodies and policies – they do play a role in the development and deployment zigzag.  And different governments have different incentives and approaches to the matter. This may have interesting tipping points and “good enough” technology selection and market approval choices, even by pure chance.”

Mundane applications such as tracking inventory or coupons as described in chapter 5.  Perhaps integrating a CRM API with a ledger could allow companies to track customer sales, or as mentioned in chapter 4, figuring out ways to integrate EDI with a ledger could likewise enable robust and secure supply chain management with all vendors.  Kajander also sees some of the current crypto-based solutions hammer-like, or in his words, “everybody in the field is excited and has a proverbial hammer in their hands.   And there seems to be so many nails all over the place, or at least that what they seem to see.”   Not every solution needs a new ledger or needs to be decentralized.

One comparison that Kajander used involves the disintermediation of the entertainment industry, “if you look at Napster and BitTorrent, both created disruptions to the marketplace and after the dust settled, it was iTunes and Netflix that became the platforms adopted by mainstream consumers.  Similarly Orkut was incredibly popular with specific countries like Brazil and India but was completely passed over by the larger social networking consumer-base.  In many ways, these platforms being built today could start as a Napster but end up as iTunes.  In fact, while there was a lot of idealism in the ‘90s about what the internet could do or should do, the actual long-term use-cases involved a balancing act between capabilities and policy making.”  Netflix and Youtube combined now account for roughly half of the bandwidth consumed during peak-hours in the United States.24

Kajander and several others I spoke with, see an intersection between cryptoledgers and non-profit organizations as well.  As noted in chapter 5, there was a notable example of fund mismanagement in China related to the 2008 Sichuan earthquake.  According to Kajander, “in the future non-profits such as the William and Melinda Gates Foundation could utilize cryptoledgers to track their donations projects or even funds throughout the globe, providing a transparent and real-time auditable framework to their initiatives.  Perhaps even a Kiva and Bitcoin-like mashup could emerge for similar emerging markets.”  Kiva is a non-profit organization that allows people to send and receive money via the internet to entrepreneurs and students in underserved countries.   Other charities could benefit from this transparency as it also reduces administrative overhead by removing the need for several functionaries.

Continuing, “the blockchain is virtually incorruptible, it cannot be changed or reversed.  So in the future, having elections could be as easy as each user submitting their digital signature for a particular policy or candidate and the election could be both quickly verified and difficult, if not impossible to cheat.  Voting is not limited to national elections either, as villages, classrooms, any organization could use a token-based cryptoledger system to provide a transparent mechanism for the electioneering process.  All someone needs is access to a mobile phone or laptop.”

Specific examples could be community organizations that hold votes to release funds to improve hospitals, schools and libraries.  Coupled with the assurance contracts discussed in chapter 2, voters or voiceholders as Adam Levine describes them, could review the votes and act on the consensus.  Thus as Kajander and Hakim Mamoni have explained, you can remove middlemen, bureaucracies and allow direct involvement between two or more parties (e.g., reduce the hierarchy between the borrowers and lenders; recipients and donors).

Another way that for-profit companies can utilize this token system is through a matching campaign.  For instance, if you purchase $50 of Nike products online, a cryptocurrency could be issued and sent to your wallet.  In an offline situation, the product could have a scanable QR code that serves the same function.  They can then be sent to a charity or NGO of your choice and Nike will redeem and donate a certain amount of prearranged money to the recipient.  In Kajander’s words, “these initiatives could be for a particular purpose (e.g., infrastructure for clean water, new trees planted) and could scale into the hundreds of thousands, even millions through the use of smartphones.”  Again, as described in chapter 2, these tokens do not necessarily have to have some kind of fiat value attached to them, but rather serve as a virtual representation of a vote.

China

At a basic level there appears to be a lack of clear property rights and contractual rights in China.  While some jurisdictions like Shanghai are more transparent and modern than others, no one actually owns property for more than 70 years, after which it is automatically reverted back to the state.25  In many cases, the actual property may only have a 40 or 50 year lease left because of the different staggered stages of post-Mao liberalization.  Furthermore, at any given time some of these titles can be revoked or modified by a 3rd party without due recourse.26

As a consequence, despite reforms over the years, land confiscation is still common.   For example, each year approximately four million rural Chinese are evicted from their land.27 Why?  Because, according to an HSBC report, local governments generate 70% of their income from land sales much of which are ill-gotten gains for one or more party (e.g., state-owned firm’s pressure local leaders to evict farmers from land).28 Through the adoption of cryptoledgers, each level of government could benefit, not only by being able to track and manage the funds of its associates, but by being able to track these land titles in a transparent, unforgeable manner.

Additionally, a 2004 report from the OECD found that roughly half of all urban Chinese workers primarily migrant workers from the inner provinces participated in the “informal” sector.2930 They might benefit if their payroll and compensation was managed by a decentralized autonomous organization (DAO), a cryptographically controlled AI agent, rather than a human boss (laoban) who could arbitrarily change his or her mind or otherwise abuse the relationship (e.g., change the contract ex post).3132 For instance, without an urban household registration (hukou), most of these migrant workers are left without any legal recourse in the event that their contracts are tampered or ignored.33 Yet with an independently run DAO these same individual could potentially still be automatically paid based on previously agreed to condition or at least bring the issue to an arbiter; and if they are recognized, a government court.

While it remains to be see how policy makers will react to these new innovations, these cryptoprotocols could provide new tools for everyone to reduce costs and secure value.

Startup Cities Institute

Zachary Caceres is the executive director of Startup Cities Institute (SCI), a non-profit research center at Universidad Francisco Marroquín located in Guatemala.34 In an email exchange I asked him why an NGO and specifically his project would find cryptocurrencies of use.  In his words, “at SCI, we are most excited by the humanitarian possibilities of cryptocurrencies.  Many of the world’s poorest face high inflation and instability in their national currency.  Despite all its volatility right now, cryptocurrencies may actually prove to be a better choice than politicized money in some developing nations. In countries like Guatemala, where we’re based, security is also a constant problem.  Robbery is common, especially in poorer neighborhoods.  Cryptocurrencies could be a safe alternative to store your savings.”

As noted earlier by Alan Safahi as well as Wences Casares and Sebastian Serrano, one of the areas that cryptocurrencies can already disrupt is the remittance marketplace.   In 2012, approximately 1.5 million Guatemalans (roughly 10% of the population) worked abroad and remitted $4.8 billion back home, making Guatemala one of the largest receivers globally; and remitting through Bitcoin or Ripple could reduce the fees substantially.35 As Caceres notes, “With Bitcoin or another digital currency on both ends of the transaction, you could have instantaneous transfers at a much cheaper rate.  Perhaps something like a debit card could be loaded from the U.S. and then cashed out in a developing nation. There is a huge market opportunity here.”

One challenge that his team is facing with their new incubator, SCI Ventures, is developing an ATM.  Their goal is to bring cryptocurrencies to developing countries and thus because most people do not always have a computer or reliable internet access, in their view “people will need an easy interface, either by phone or ATMs.”  So how could they make a secure Bitcoin ATM ubiquitous in the streets of cities like Mumbai or Nairobi?  “It’s still too expensive. There’s a long way to go. But we’re working with some entrepreneurs and designers to try to push this along.”

Other projects and vendors in the Bitcoin ATM space include Lamassu, Skyhook, Genesis and Robocoin.36

And how does this tie in with the rest of the guide?  According to him, “this interest in cryptocurrencies ties in to our broader project, Startup Cities.  What if law and governance is just a technology like any other?  Smart property and smart contracts raise this question clearly. If law and governance is just a technology, then perhaps it could be open to disruptive innovation.  What we are developing at SCI is the idea of using small zones to pilot comprehensive reforms in the legal, political, and economic systems of nations. Instead of trying to fix the whole country, just make several small, competing zones with different institutions and let people vote with their feet.  Some may fail and others may be spectacular successes, just like in any other startup environment.  The startup municipalities that work can grow by attracting money, talent, and capital.  Nations can then bring good reforms to the national level.  This is a low-cost, low-risk way to bring major improvements to the developing world. It does not force anything on anyone, and respects human rights each step of the way.”

Startup Cities has a unique entrepreneurial approach to public policy that is being pursued by other independent groups including Blueseed and the Urbanization Project (e.g., Charter Cities).37

Another issue he brought up was one that Preston Byrne, Hakim Mamoni and Petri Kajander have also discussed: using cryptoledgers to provide transparency for organizations including governments.  In his view, “we have the broad outlines of a transparency platform we call MuniBit. It seems possible that with public Bitcoin wallets or another transparent cryptoledger, you could bring near-total transparency to a government’s finances.”

Another obvious application of transparent internal accounting would be for NGOs themselves because, “the governance structure of Startup Cities could also be enhanced by cryptographic technologies.  At least in principle, municipal governments could be held as something like a DAO.  Citizens could actually become shareholders in their local government.  Citizens could make political decisions through transparent digital processes and interfaces set up around a DAO.”

While it remains to be seen whether or not a DAO could provide such functionality, multisignature addresses and oracle based wallets, or Hierarchical Deterministic Multi-signature (HDM) wallets, such as CryptoCorp already exist, providing small organizations the ability to perform some of these functions such as securely voting and releasing funds.38

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  1. Let’s Talk Bitcoin [↩]
  2. eBay Views BitPay and Coinbase as Potential PayPal Competitors from CoinDesk [↩]
  3. Wells Fargo calls Bitcoin summit on ‘rules of engagement’ from Financial Times [↩]
  4. See Demand and supply statistics from World Gold Council [↩]
  5. 3 Infographics on the Future of Digital Retail from JCK and Ecommerce Sales Topped $1 Trillion for First Time in 2012 from eMarketer [↩]
  6. It should also be noted that while the low-hanging fruit of smart contracts is securities trading, it is highly unlikely that a professional trader would use a blockchain directly for an HFT.  For example, in most markets, especially the very liquid ones, where latencies are counted by increasingly smaller segments of time, the pace of 1 block per 10 minutes (or even 2.5 minutes) is limiting.  Open-Transactions (OT) has the ability to create safe ‘centralization’ through federation and ‘voting pools.’   Essentially there would be off-chain exit nodes that transfer to HFT clusters.  See Voting Pools: How to Stop the Plague of Bitcoin Heists, Thefts, Hacks, Scams, and Losses from Bitcoinism and How can Open Transactions benefit Bitcoin? from StackExchange [↩]
  7. See also Chapter 3 on the discussion of Simplified payment verification (SPV) and How explicitly can the blockchain be pruned? from StackExchange [↩]
  8. Professor Evans uses a different title “Chart 1” than what is in this manuscript.  See Bitcoin Payments: Igniting Or Not? by David Evans [↩]
  9. From oil painter to the C-suite from Financial Times and M-Pesa helps world’s poorest go to the bank using mobile phones from The Christian Science Monitor [↩]
  10. NXT currently has a maximum rate of 255 transactions per block and 1 block is processed every minute, so roughly 4 transactions per second.  However, ‘transparent mining’ is a new feature that is being developed by NXT which will enable it to compete with Ripple and other payment platforms.  See Transactions per block and maximum transactions per second from Nextcoin.org and Transparent mining, or What makes Nxt a 2nd generation currency from Bitcointalk [↩]
  11. Another reviewer suggested that this was not an apples-to-apples comparison because SMS functionality is built into the feature-phones that Kenyans have.  Thus a Bitcoin app would have to be on every phone and there would need to be people willing to accept Bitcoin in order for this to be a fair comparison.  While this may be the technical case, the larger issue is that media coverage of Bitcoin dwarfs similar M-PESA coverage in nearly every market, yet despite this, there has been very little adoption due to the reasons discussed in this manuscript (e.g., cumbersome wallets, security vulnerabilities on the edges, no ‘smart fine print’). [↩]
  12. Visa’s system has an uptime near 100% during peak times of up to 20,000 transactions per second and encrypts every transaction separately; key hashes expire roughly three seconds later reducing exploits to zero (e.g., zero money stolen off the wire, or out of merchant accounts).  According to Visa, it spent $425 million on IT expenses for the year ending on September 30, 2010.  While decentralized systems have some advantages, in computer science, they cannot currently simultaneously fulfill the following guarantees: consistency, availability, partition tolerance (called the CAP theorem).  They can provide two-of-three but usually not all three simultaneously.   In addition, while it may be reduced later, the infrastructure costs of maintaining this proof-of-work system is significantly higher than Visa’s.  See Comparing VISA and DoD I.T. by Paul Strassmann [↩]
  13. ACH stands for Automated Clearing House, which is an electronic financial network in the US.  In 2012 it processed 21 billion transactions worth a total of $36.9 trillion.  See ACH Payment Volume Exceeds 21 Billion in 2012 from NACHA [↩]
  14. This issue was recently highlighted in a very articulate article, Bitcoin – A Jack of All Trades is the Master of None by Ken Griffith.  There are other financial startups in the payments space including Coin (a swipeable card) and Ricardo.  In addition, Apple is including functionality with new iPhone hardware and software that allows Bob to scan barcodes at stores and instantly pay with his phone instead of going to the checkout.   Bob can also pay with a photo of the item.  See Bitcoin vs. Coin: Which will have the most success in 2014? From The Next Web, Ricardo – An Executive Summary and Apple Pushes Deeper Into Mobile Payments from The Wall Street Journal [↩]
  15. See Bitcoin Seen as Little Threat to Payment Firms from Bloomberg.  MasterCard recently launched a new location-based service called Syniverse.  See MasterCard Creates New Payment Product With A Company Most Have Never Heard Of. by Brian Roemmele [↩]
  16. Bitcoin Client Num Downloads from Bitcoin Pulse [↩]
  17. The actual number as of this writing is 1,307,387 addresses that hold 99.99% of all bitcoins.  Again, these are addresses not users.  These addresses can be managed by exchanges which have thousands or even millions of users.  See Bitcoin Distribution by Address at Block 285,000 from BitcoinRichList [↩]
  18. AWS is both centralized and decentralized depending on your perspective.  The datacenters themselves are distributed globally in specific geographic locations.  Yet a user can split databases and computation into decentralized nodes/instances within these datacenters.  See Amazon Architecture from High Scalability Customer Centricity at Amazon Web Services from All Things Distributed [↩]
  19. While Mint, Ubuntu and Fedora are more popular on desktops, in terms of overall usage and penetration, Android is far and away the leader in Linux-based adoption.  See The most popular end-user Linux distributions are… from ZDNet [↩]
  20. Centralized versus decentralized information systems : A historical flashback by Mats-Åke Hugoson, Centralization Versus Decentralization: A Closer Look at How to Blend Both by Shelly Heiden, Decentralized Information Technology Requires Central Coordination! By Sarah Michalak, Julio Facelli and Clifford Drew, Mae Gets A New Job from Library and Information Center Management and Gartner Identifies 10 Key Actions to Reduce IT Infrastructure and Operations Costs by as Much as 25 Percent from Gartner [↩]
  21. The disruptive potential of smart contract for the entire financial industry, not just fiat credit facilities, is enormous. Charles Stross, the British sci-fi author, recently criticized Bitcoin and the cryptocurrency endeavor, wishing that it die a quick death (in fire no less).  While his contentions were fallacious on a number of counts (especially regarding the environmental impact), ironically, he previously predicted seven years ago that near-future sci-fi authors are still probably missing something disruptively as large as the Internet 20 years ago or the smartphone was this past decade.  In other words, just as rewatching older sci-fi films that failed to foresee drones and self-driving automobiles seems dated, the portrayal of centrally managed financial products may one day be viewed as an anachronism of our not-so-quaint analog past.  Thus, Stross’ prediction of another unforeseen invention could very well be these smart property applications and digital financial instruments that are managed and transported by the very same cryptoledgers he dreamt of burning.  See Shaping the future and Why I want Bitcoin to die in a fire by Charlie Stross and Charles Stross takes on the Bitcoin community by Tim Swanson [↩]
  22. While it may be contentious to claim, the cryptocurrency industry may end up following the banking industry development, perhaps meeting with the current system somewhere in between.  For example, there will likely be whole liquidity providers (market makers) and clearing houses.  Arguably the easiest and perhaps quickest that can happen is incumbents entering the market. [↩]
  23. SecondMarket jumps to give legitimacy to Bitcoin from USA Today [↩]
  24. Netflix and YouTube are the Internet’s bandwidth consumption kings from BGR [↩]
  25. See Chinese Land-Use Rights: What Happens After 70 Years? from China Smack, China’s Real Estate Riddle from Patrick Chovanec, You May Own your Apartment, but who Owns the Land Underneath Your Feet? by Thomas Rippel, If Beijing is your landlord, what happens when the lease is up? from China Economic Review and Chinese fear homes are castles in the air by Stephen Wong [↩]
  26. See China’s Land Grab Epidemic Is Causing More Wukan-Style Protests from The Atlantic, China Tackles Land Grabs, Key Source of Rural Anger from The Wall Street Journal, China land price fall threatens local finances from Financial Times and China’s land-seizure problem from Chicago Tribune [↩]
  27. See China’s Land Grab Epidemic Is Causing More Wukan-Style Protests from The Atlantic and China Tackles Land Grabs, Key Source of Rural Anger from The Wall Street Journal [↩]
  28. See China land price fall threatens local finances from Financial Times and China’s land-seizure problem from Chicago Tribune [↩]
  29. This is between 120-150 million workers, see Internal Migration in China and the Effects on Sending Regions from OECD [↩]
  30. It should be noted that the term ‘formal’ versus ‘informal’ economy boils down to whether or not economic activities are tracked and taxed by a government agency.  The majority of global economic trade and exchange has and is conducted informally, that is to say “untaxed.”  For example, transactional exchanges that are not monetized – consulting with friends, families and even strangers – are not taxed.  In many cases ‘informal’ activity is just as transparent and efficient as ‘formal’ sectors, yet for many migrant workers, a lack of property rights and contractual structure creates abusive situations.  Most social capital activities would fall under this definition yet the actual activities can be both productive and economically rewarding for the participants.  System D is another name for it.  See The Shadow Superpower by Robert Neuwirth and Could Bitcoin Become the Currency of System D? by Jon Matonis [↩]
  31. See Computer corporations: DAC attack from The Economist, Bootstrapping A Decentralized Autonomous Corporation: Part I by Vitalik Buterin and Bitcoin and the Three Laws of Robotics by Stan Larimer [↩]
  32. DAX is another term for the overall idea, decentralized autonomous ‘x’ where the ‘x’ can stand for corporation, organization, application, etc.  For a spirited conversation regarding this topic involving Charles Hoskinson (Ethereum), David Johnston (Mastercoin) and Daniel Larimer (Invictus/Bitshares) see episode 80 – Beyond Bitcoin Uncut from Let’s Talk Bitcoin. [↩]
  33. Hukou system and China: Urbanization and Hukou Reform from The Diplomat [↩]
  34. See Startup Cities Institute and Hacking Law and Governance with Startup Cities by Zachary Caceres.  Interested parties can contact Mr. Caceres at: startupcities@ufm.edu [↩]
  35. Remittances flows to Latin America and the Caribbean remain stable at $61bn from Inter-American Development Bank and Remittances to Guatemala increased by 14.5 percent in January from The Tico Times [↩]
  36. Lamassu, Skyhook, Genesis and Robocoin [↩]
  37. See Blueseed, Urbanization Project, Software Is Reorganizing the World and Silicon Valley’s Ultimate Exit (slides) by Balaji Srinivasan [↩]
  38. Securing wallets by integrating a third-party Oracle from CryptoCorp [↩]

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