Posts from hacking finance

Some Thoughts On Ethereum and The DAO

As many (most, all?) of you know, last week The DAO, a large crowdfunding experiment based on the Ethereum blockchain, was hacked and something like $50mm of Ether was taken from The DAO. That Ether may end up being recovered due to a fork of Ethereum that was done in response to the hack. Much of this was covered in Nathaniel Popper’s post in the New York Times last friday.

I won’t say that I predicted this but I certainly saw something like it coming in my blog post on Experiment and Scandal that I wrote a month ago.

Ethereum is brand new technology. The smart contracts that can be built on Ethereum are an entirely new thing and we are just seeing what works and doesn’t work with this technology. It is safe to say that the contracts that The DAO wrote did not work. The DAO is a failed experiment that suffered from more than poorly written and ill conceived smart contracts. It also suffered from way too much money and hype being invested in it. I was thinking of The DAO when I wrote these words a month ago:

I find myself wishing we could keep the dollars invested and hype down when we do these massively public experiments

It is an open question about what impact the failure of The DAO will have the future of the Ethereum experiment. It certainly shows that pairing a public and open blockchain with a Turing complete programming language and a smart contracts system is a very ambitious and potentially very dangerous idea. The price of Ethereum in dollars has been halved as a result of The DAO failure and it is unclear if the bleeding is over on that price chart. There is a very well articulated debate on Hacker News right now about the future of the Ethereum experiment. If owning Bitcoin is like buying an IPO stock, owning Ethereum right now is like buying into a Series A round. Let’s just make sure we all understand that please.

My partner Albert who is way smarter about the technology here than I am wrote a post on his thoughts on this subject over the weekend. You will see that he and I see things pretty much the same way (shock!). He ends his post with this thought:

Blockchains and smart contracts are amazing new tools in our overall technological toolset. We have to learn how to deploy them to the best uses (many of which have yet to be invented). That will take failures. The DAO is not the first one (e.g., Mt. Gox) and won’t be the last one.

I could not have said it better.

The Buy Bitcoin Button

If you have an app that uses Bitcoin for something, like virtual goods in a game, you need to give your users an easy way to buy the Bitcoin.

Our portfolio company Coinbase has a solution for that problem. It is a “Buy Bitcoin” button, powered by the Coinbase API.

There are some limitations to the buy button right now, which Coinbase hopes to remove over time. They are:

The Buy Widget is currently limited to customers in the United States using debit cards. To enable instant buys with limited KYC, the Buy Widget supports buys up to $5 per day. Each user has also a lifetime limit of $50 after which they are asked to set up a full Coinbase account. These limitations are only temporary and we’ll be adjusting them and adding more payment methods over time to increase limits.

I think that virtual currencies, like Bitcoin and Ethereum, are a great way to create “economies” in your app. So if you want to experiment with this idea, try out the Coinbase Buy Bitcoin button. Details for developers are here.

Experiment and Scandal

We are living in a time of great experiments. They are not happening in the lab. They are happening in the real world. And they are being financed by real people. We are witnessing the de-institutionalization of experimentation. We are returning to a time when anyone can be an inventor and innovator. Some of this has happened because of the explosion of venture capital, both in the US and also around the world. Some of this has happened because entertainment and culture has embraced the world of experimentation and innovation (Shark Tank, Silicon Valley). Some of this has happened because the tools for innovation and experimentation have become mainstream and anyone can use them.

I am not thinking of one thing. I am thinking of many things. I am thinking of The DAO. I am thinking of Bitcoin and Ethereum. I am thinking of Oculus getting financed on Kickstarter. I am thinking of the launch of equity crowdfunding for everyone in the US last week. I am even thinking of things like Theranos.

All of these things are great experiments that will produce great benefit to society if they succeed. But by their nature experiments often fail. They need to fail. Or they would not be experiments.

And one of the challenges with the de-institutionalization of experimentation is that some of these failures will be spectacular. Combine that with the idea that these experiments are being funded by real people and the idea that the world of media/entertainment/culture has injected itself right in the middle of this brave new world and you have the recipe for scandal. And scandal will naturally result in efforts to put the genie back in the bottle (Sarbanes Oxley, Dodd Frank). And these regulatory efforts will naturally attempt to re-institutionalize experimentation.

I find myself wishing we could keep the dollars invested and hype down when we do these massively public experiments. But the dollar/hype cycle is a natural part of being human. Some dollars are invested. We get excited about this investment. We talk it up. More people find out about it and more dollars are invested. More of us get excited about this investment and we talk it up more. Rinse, repeat, rinse, repeat and you get unicorns and distributed autonomous funding mechanisms entrusted with hundreds of millions before anything has even been funded. Eventually some of that gets unwound and the tape is full of red.

Don’t get me wrong. I am all for distributed autonomous organizations and the innovation behind them and in front of them. There isn’t much out there that I am more excited about. But I am also very fearful that this could end badly. And even more fearful of what may be foisted on us by well meaning regulators when that happens.

So let’s celebrate this incredible phase of permissionless innovation we are in. And let’s all understand that we will have many failures. Some of them spectacular. Money will be lost. Possibly hundreds of millions or billions. Let’s expect that. Let’s build that into our mental models. So when that happens, we can suck it up, deal with it, and keep moving forward. Because an open permissionless world of innovation that everyone can participate in is utopia in so many ways. The good that will come of it will massively outweigh any bad. But bad there will be. I can assure you of that.

The Business Blockchain

the business blockchainI’ve been reading The Business Blockchain this weekend. It was written by AVC community member William Mougayar.

This book started out as a Kickstarter project which I blogged about at the time. If you backed that project you will get a copy of this book. If not, you might want to get a copy on Amazon.

I am not done with it yet, but the book makes a complex subject, blockchain technology, accessible for the non-technical. It also lays out some of the more obvious uses cases for the technology and explains how the blockchain technology market is evolving.

If you think you might want to start a business based on blockchain technology or if you think blockchain technology is going to reshape a market you are working in, or if you just want to understand this thing that your son or daughter is obsessed about, then this is a great book to read.

I am also quite proud that the conversations we have had on this blog on this topic over the past five years have shaped William’s work and certainly had something to do with his interest and his growing expertise and reputation in this area.

This blog community is a talented group and we have helped each other grow and develop. This book is just one of many examples of that.

MIT Digital Currency Initiative

My alma mater is doing some really good work in the area of digital currencies. MIT, via its Media Lab, has built something called the Digital Currency Initiative. The basic idea of the DCI is to bring together researchers and scientists from all over the world and from many different disciplines (cryptography, economics, privacy, distributed systems, etc) to collaborate on research and efforts to promote and develop digital currency and distributed ledger technologies. This is a institute wide initiative at MIT though its center of gravity is in the Media Lab.

Earlier this week, MIT’s DCI announced a $900,000 Bitcoin Developer Fund. The Gotham Gal and I were one of the financial backers of this fund which will pay the salaries of developers who work on the open source codebase that is at the core of the Bitcoin protocol. It is important to note that as a financial backer of this fund, we do not have any influence over these developers. That is true for all of the financial backers. In the true sense of “academic freedom” the Bitcoin Developer Fund has a “hands off” approach to the developers it supports. This quote is from the announcement:

The establishment of this fund enables us to offer positions in a neutral academic environment. This allows developers like Wlad, Cory and Gavin to work on code and develop new ideas that may be controversial, but can do so with the assurance that they won’t be fired for diversity of thought.

I would love to see this fund grow in size over time and be able to support a larger group of computer scientists and developers to work on forks of Bitcoin and other digital currencies like Ethereum. Diversity of thought is badly needed in this important new technology sector and we don’t have enough of it right now.

While I’m on the topic of diversity, DCI also announced $100,000 in “diversity scholarships” this week. Here are the details:

The MIT Digital Currency Initiative (DCI) is excited to announce more than $100,000 in scholarships and support for underrepresented minorities and women to attend Consensus 2016: Making Blockchain Real. In collaboration with CoinDesk, a news site specializing in bitcoin and digital currencies, the DCI will be selecting 50 Consensus Scholars to attend the event on May 2–4 in New York City. This will be our second year collaborating on a scholarship effort for the conference–we are excited to continue to foster a more diverse community of attendees at Consensus. Click here to apply!

If you are a woman or a minority with an interest in Bitcoin, Ethereum, and other blockchain related technologies, you should apply for one of these 50 scholarships at the link above.

I am pleased by and proud of MIT’s efforts in this area. Entrepreneurs and investors are doing a lot to move the state of the blockchain technology sector forward, but there is a big role to be played by the world of academia. And MIT is certainly doing its part.

Feature Friday: Paying With Your Phone

The other day I went to Whole Foods on the way home from yoga. It was around 7pm and the store was packed. I bought a whole bunch of stuff and when I got to checkout, I realized I did not have my “wallet” on me. I used quotes around “wallet” because those who know me know that I don’t carry a wallet. I just carry a bunch of cards held together with one of my daughter’s hair bands.

Anyway, I kind of flipped out thinking that I had just wasted a half hour shopping for stuff that I could not pay for. But then I thought about my phone. I asked the cashier if Whole Foods took Apple Pay (I”m on an iPhone right now), and she said “yes.” So she rang me up, I held my phone over the card swipe device, and I was out of there in about one minute. She told me it is actually easier for her to check a person out on their phone than via a card swipe.

You can do the same with an Android Phone with Android Pay. So both major mobile operating systems are now a substitute for carrying around a bunch of cards held together with a hair band.

I don’t think I am going to stop carrying around my cards anytime soon because not every store accepts Apple Pay and Android Pay. The very next morning I asked the barista at Blue Bottle if I could check out on their Square device with Apple Pay and she said it wouldn’t work. I found that a bit strange. I would have expected that Square would support both Apple Pay and Android Pay. But I guess they do not.

Which leads me to a feature request for Foursquare. They should start collecting information on their venues’ payment systems. Collecting information on Apple Pay and Android Pay support would be a great start. Venmo, Square Cash and Bitcoin might also be relevant in the future, who knows? Those of us who have sworn off cash and want to swear off cards too just need to know these things.

Bitcoin Is Having An Election

Brian Armstrong, CEO of our portfolio company Coinbase, published this deck on Friday.

In the deck, Brian argues that the current debate over Bitcoin scaling is an “election” not a “split.”

There is certainly a raging debate in the bitcoin community about how to scale Bitcoin and the value of decentralization versus scalability. That debate has been going on for quite a while and may continue to go on for much longer. But one way or another, Bitcoin will eventually figure out how to scale. The process may be messy, but so is the process of electing a President. That’s one of the main points Brian makes in his deck.

Another important point Brian makes is the need for competition in core development. Since the beginning of Bitcoin, the development of Bitcoin’s core software has been done by a small group of developers who have come to be known as Bitcoin Core. That has led to a dependence that is not entirely healthy. Brian makes the comparison to web browsers where there are four competing browsers, all with more than 10% market share and none with more than 50% market share. Each browser development team competes to bring new technologies to market, some of which eventually get adopted by all of them. And consumers have the choice of which ones to use. That is a much healthier market architecture for sure.

For me, this scaling debate is not really about Core vs Classic or XT or any other version of the core protocol. I suspect in ten years none of them will be used. Much like nobody uses the Netscape browser anymore. This debate is about whether we want a truly diverse and distributed developer ecosystem building, innovating, and maintaining the software at the core of Bitcoin. And I think the answer to that question has to be yes. It’s just a question of how we get there.

Bitcoin Is Dead, Long Live Bitcoin

I’ve been writing about the Bitcoin blocksize debate here at AVC (the only place I write and I’m hard core about that) for the past year. It’s a big deal. At the core of the debate is whether the Bitcoin blockchain should be a settlement layer that supports a number of new blockchains that can be scaled to achieve various goals or whether the Bitcoin blockchain itself should evolve in a way that it can scale to achieve those various goals.

In my simple mind I liken it to this. Should Bitcoin be Gold or should Bitcoin be Visa. If it is Gold, it’s a store of wealth and something to peg value to. If it is Visa, then its a transactional network that can move wealth around the globe in a nanosecond.

Mike Hearn, one of the early members of the Bitcoin core developer team, published a blog post yesterday stating that “Bitcoin Has Failed” in which he explains that the block size stalemate plus a few other big issues have led him to believe that Bitcoin is now a failed experiment.

When one of the most important people in Bitcoin states something like that you have to listen. I read his entire post a couple times. And I generally agree with his description of what has happened and, more importantly, what has not happened. I’m not ready to declare that Bitcoin has failed. But I’ve always viewed Bitcoin as an experiment that could fail and I still do. I personally own a material amount of Bitcoin, but in our personal asset allocation it is at the very bottom, below our wine collection. And I’m not a wine collector.

In every Bitcoin investment we’ve made at USV, and we’ve made four with multiple rounds in one, we have identified the failure of Bitcoin as a core risk element. We haven’t stopped including that in our risk factors. So we have our eyes wide open about the fragility of Bitcoin. But we also have our eyes wide open about the potential and the importance of this technology.

I personally believe we will see a fork accepted by the mining community at some point this year. And that will come with a new set of core developers and some governance about how decisions are made among that core developer team. But it could well take a massive collapse in the price of Bitcoin, breakdowns in the Bitcoin network, or worse to get there. And all of that could cause the whole house of cards to come crashing down. Anything is possible. Even the return of Satoshi to fix things as an AVC regular suggested to me in an email this morning.

The Bitcoin experiment is six years old. There has been a significant amount of venture capital investment in the Bitcoin ecosystem. There are a number of well funded companies competing to build valuable businesses on top of this technology. We are invested in at least one of them. And the competition between these various companies and their visions has played a part in the stalemate. These companies have a lot to gain or lose if Bitcoin survives or fails. So I expect that there will be some rationality, brought on by capitalist behavior, that will emerge or maybe is already emerging.

Sometimes it takes a crisis to get everyone in a room. That’s how the federal budget has been settled for many years now. And that may be how the blocksize debate gets settled to. So if we are going to have a crisis, let’s get on with it. No better time than the present.

Bitcoin: Democracy and Debate

Brian Armstrong, founder and CEO of our portfolio company Coinbase, published two back to back posts yesterday on the dual topics of Bitcoin governance and the scaling Bitcoin debate.

and

I’d encourage everyone interested in Bitcoin to read these posts as they address two of the most important issues facing Bitcoin today; how Bitcoin is governed and how Bitcoin’s transaction processing power should be scaled from its current levels to Visa/PayPal levels over the next 5-10 years.

There are many reasons why Bitcoin is so interesting but for me the core reason is the decentralized nature of the technology and how it is designed to operate and evolve. Bitcoin is political in the sense that it has a belief system and that is that no one person or entity should control it.

What we are seeing right now is a test of that belief system and how Bitcoin answers this test will say a lot about its future. I happen to agree with Brian’s views on both topics and I am glad that Brian and Coinbase is stepping up and taking a vocal position on both.

What Happened In 2015

Last year in my What Just Happened post, I said:

the social media phase of the Internet ended

I think we can go further than that now and say that sometime in the past year or two the consumer internet/social/mobile gold rush ended.

Look  at the top 25 apps in the US:

top 25 apps

The top 6 mobile apps and 8 of the top 9 are owned by Facebook and Google. 10 of the top 12 mobile apps are owned by Apple, Facebook, and Google.

There isn’t a single “startup” on that list and the youngest company on that list is Snapchat which is now over four years old.

We are now well into a consolidation phase where the strong are getting stronger and it is harder than ever to build a large consumer user base. It is reminiscent of the late 80s/early 90s after Windows emerged as the dominant desktop environment and Microsoft started to use that dominant market position to move up the stack and take share in all of the important application categories. Apple and Google are doing that now in mobile, along with Facebook which figured out how to be as critical on your phone as your operating system.

I am certain that something will come along, like the Internet did in the mid 90s, to bust up this oligopoly (which is way better than a monopoly). But it is not yet clear what that thing is.

2015 saw some of the candidates for the next big thing underwhelm. VR is having a hard time getting out of the gates. Wearables and IoT have yet to go mainstream. Bitcoin and the Blockchain have yet to give us a killer app. AI/machine learning has great potential but also gives incumbents with large data sets (Facebook and Google) scale advantages over newcomers.

The most exciting things that have happened in tech in 2015 are happening in verticals like transportation, hospitality, education, healthcare, and maybe more than anything else, finance, where the lessons and playbooks of the consumer gold rush are being used with great effectiveness to disrupt incumbents and shake up industries.

The same is true of the enterprise which also had a great year in 2015. Slack, and Dropbox before it, shows how powerful a consumerish approach to the enterprise can be. But there aren’t many broad horizontal plays in the enterprise and verticals seems to be where most of the action was in 2015.

I’m hopeful that 2015 will also go down as the year we buried the Unicorn. The whole notion that getting a billion dollar price tag on your company was something necessary to matter, to be able to recruit, to be able to get press, etc, etc, is worshiping a false god. And we all know what happens to those who do that.

As I look back over 2014 and 2015, I feel like these two years were an inflection point, where the underlying fundamentals of opportunity in tech slowed down but the capital rushing to get invested in tech did not. That resulted in the Unicorn phase, which if it indeed is over, will be followed by an unwinding phase where the capital flows will need to line up more tightly to the opportunity curve.

I’m now moving into “What Will Happen” which is for tomorrow, so I will end this post now by saying goodbye to 2015 and hopefully to much of the nonsense that came with it.

I did not touch on the many important things that happened outside of tech in 2015, like the rise of terrorism in the western world, and the reaction of the body politic to it, particularly here in the US with the 2016 Presidential campaign getting into full swing. That certainly touches the world of tech and will touch it even more in the future. Again, something to talk about tomorrow.

I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.