Posts from blockchain
As you can see, I am not writing this presidents day weekend. I explained why on friday.
Instead I’ve been posting things that I found worth sharing with all of you.
This is a portion of the post that I like very much.
Decentralization is a commonly misunderstood concept. For example, it is sometimes said that the reason cryptonetwork advocates favor decentralization is to resist government censorship, or because of libertarian political views. These are not the main reasons decentralization is important.
Let’s look at the problems with centralized platforms. Centralized platforms follow a predictable life cycle. When they start out, they do everything they can to recruit users and 3rd-party complements like developers, businesses, and media organizations. They do this to make their services more valuable, as platforms (by definition) are systems with multi-sided network effects. As platforms move up the adoption S-curve, their power over users and 3rd parties steadily grows.
When they hit the top of the S-curve, their relationships with network participants change from positive-sum to zero-sum. The easiest way to continue growing lies in extracting data from users and competing with complements over audiences and profits. Historical examples of this are Microsoft vs Netscape, Google vs Yelp, Facebook vs Zynga, and Twitter vs its 3rd-party clients. Operating systems like iOS and Android have behaved better, although still take a healthy 30% tax, reject apps for seemingly arbitrary reasons, and subsume the functionality of 3rd-party apps at will.
For 3rd parties, this transition from cooperation to competition feels like a bait-and-switch. Over time, the best entrepreneurs, developers, and investors have become wary of building on top of centralized platforms. We now have decades of evidence that doing so will end in disappointment. In addition, users give up privacy, control of their data, and become vulnerable to security breaches. These problems with centralized platforms will likely become even more pronounced in the future.
My friend Gordon texted me this podcast and said “AI, blockchain, and homomorphic data. Trifecta!”
I gave it a listen and indeed some very interesting concepts are discussed in this one.
A lot of people in the crypto sector have suggested that ICOs and tokens are the future of early stage investing and highly disruptive to my business (venture capital).
In this video (yet another from the Upfront Conference), VCs and other investors discuss why that may not be the case.
Last week I posted a video that the folks at Upfront Ventures did on the current investor mindset in crypto. There are few more videos in this Upfront series and today I am posting one about the shift towards decentralization that the blockchain represents.
The crypto markets had a good day yesterday but have been down a lot since peaking in early January. Bitcoin peaked at almost $20,000USD in mid December and has gone down by roughly 60% since then. Ethereum peaked at almost $1400 in mid January and has gone down by roughly 40% since then.
A chart that I like to look at, the total market cap of all crypto tokens, has made a classic head and shoulders pattern and is now retracing on the downside:
The total market cap of all crypto tokens peaked at roughly $825bn and is down roughly 50% since then.
But most of you know all of this.
The more interesting question is what, if anything, to do about it.
In times like this, I like to turn to the fundamentals to figure out where things stand and how I should behave.
So how do we do a fundamental analysis of crypto prices. Is $8000 high or low for BTC? Is $800 high or low for ETH? I see people opining on these things all of the time based on historical prices and that is not a proper way to value an asset. You need to have some fundamental theory of value and then apply it rigorously.
There are plenty of people doing that kind of work in crypto-economic circles and I saw two blog posts in the last week that I thought were quite good.
Here is a post explaining the NVT ratio (network value to transaction ratio).
What you can see from these two posts is that not everyone in crypto land is speculating without thinking. There is some serious economic thinking going on and it is going to be super important in the coming years.
However, the bigger problem in crypto land is that none of the public blockchains have really shown they can scale to the volumes of transactions that would be required for blockchain technology to go mainstream. I have likened this situation to dialup modems in the 90s eventually giving way to broadband internet (and mobile broadband internet) in the 2000s. I am confident that trust-less consensus-based systems will be able to scale to the volumes we need to go mainstream but we are not there yet. The transaction ratios and monetary volumes that drive value in the economic models I linked to above just aren’t there yet to support the almost trillion dollars of value that crypto tokens reached in early January.
But there are some very promising signs out there.
We have the Lightning Network getting implemented in the real world. Lightning is Bitcoin’s great hope for scaling transaction volumes.
We have Truebit going live on an Ethereum testnet this week:
Massive milestone today — Truebit Lite is live on Rinkeby running verification for the DOGE-ETH bridge — Check out the demo! @sinahab @mattgcondon @hdswick @ethchris @robbiebent1 @mrsmkl https://t.co/e26S0imBFO …
— Truebit (@Truebitprotocol) February 5, 2018
Truebit is off-chain computation for Ethereum.
Neither I nor USV has an economic interest in either Lightning or Truebit. I mention them because they are two of the more interesting efforts out there to scale these big public blockchains. There are many more of them.
The truth is that if you look behind the scenes, you will find quite a number of strong technical teams that are working on scalability and some of the other fundamental challenges of public blockchains. The crypto sector is full of get rich quick schemes and janky token offerings, but it is also full of brilliant computer scientists and strong engineering teams working on solving these challenges. And I am quite confident that they will solve them. When and how is harder to predict.
So given all of that, how does one do a fundamental analysis of crytpo tokens and the crypto sector?
Here is a three step process that I recommend:
- Get the Cryptoassets book and read it. The authors do a great job of outlining how one can and should do a fundamental analysis on crypto tokens.
- Follow the crypto-economists who are writing regularly about this stuff and read what they have to say. I linked to two of them above in this post.
- Understand the technical challenges and follow the progress being made in solving them. As more progress is made, that should be reflected in the prices of the top public blockchains. If it is not, that would be a buying opportunity.
I don’t believe that the recent selloff is a massive buying opportunity, but I also don’t think that anything has really changed in the fundamental analysis of the sector in the past month. I remain long term bullish and short term cautious.
The annual Upfront Summit took place in LA this past week. I attended day two and enjoyed it very much.
Prior to the summit, the Upfront team interviewed a bunch of investors in the crypto sector and put together this video.
I think it captures the current investor sentiment very well.
Yesterday I went to see what the community was talking about and found this at the top of the comment threads:
I thought to myself “oh shit, the token scammers have arrived” and immediately deleted those comments and left a reply saying that I am going to update the comment policy.
So I did that this morning.
There will be no token promotions in the AVC comments, period.
I am fine with discussing the merits of various blockchain/crypto technologies and tokens, but outright promotion is not cool and I won’t allow it.
I hope this is clear and everyone understands why it is necessary.
This essay, which will run in Sunday’s New York Times Magazine, but is online now, could not have come at a better time.
All most people know about Bitcoin, Ethereum, ICOs, and alt-coins, is that you can trade them and make (and lose) money on them.
But that is not what interests me about crypto tokens and blockchain technology and it is not what interests USV and the folks in this sector we work with.
What interests us is that “crypto” could well be the architectural breakthrough that we need to move beyond the current Internet market dominated by a few large tech companies.
And Steven, as is his gift, explains this beautifully and easily in roughly 9,000 words.
This is a piece that requires sitting down with a cup of coffee or tea and reading it.
I would suggest you find some time this week to do that.