Posts from blockchain

Anti-fragile Systems

The Internet was developed by the US Defense Department to create a network that was capable of surviving a military attack. They accomplished that with a design where no part of the system was central to its operation. You can take out any part of the Internet and it will still operate.

When I read the Bitcoin White Paper for the first time, I was struck by the similarity of its design to the Internet.

And we are watching an “attack” on the Bitcoin system right now, in the form of a purge in China.

Over the last three months, the government in China has moved to rid the country of Bitcoin mining. You can see the effect of the purge on the chart of Bitcoin Hashrate:

This is a significant reduction in the processing power of the Bitcoin network and the result has been slower transaction clearing times:

It will take time for miners outside of China to pick up the slack and get the hashrate and transaction times back to where they were, but that will happen. There are economic incentives for that to happen. What would be even better, and could happen, is for this new mining capacity to get built on clean/renewable energy.

I believe the Chinese purge of Bitcoin mining is short term bearish but long term bullish for Bitcoin and crypto more broadly. It shows that a powerful government can take its best shot at a cryptonetwork and the only thing that will happen is capacity will move elsewhere.

Anti-fragility is a beautiful thing to behold.

#blockchain#crypto

Regulating Software

I understand that regulators and elected officials need to raise concerns about new technologies and their impact on society. It is their job or at least part of their job. But I am also dismayed regularly by how poorly many elected officials and regulators understand the technologies they are talking about.

In particular, I am deeply concerned with how poorly many elected officials and regulators understand blockchains, smart contracts, and decentralized applications and organizations. They assume that these things are run by companies and people and can be regulated with traditional corporate regulatory activities.

What people need to understand is that blockchains, smart contracts, and decentralized applications and organizations are not companies. They are software. And they can and do run without any company operating them.

Let’s look at Bitcoin. There is no Bitcoin Inc. There is no company to sue. The founder is unkown and may not exist. So she can’t be sued either. There is nobody to call before Congress. There is no entity to make regulatory filings.

AMMs are smart contracts. These smart contracts operate liquidity pools that allow for decentralized trading of assets without any company operating them, controlling them, or managing them. Once these software programs are published on a decentralized blockchain, they just keep running without any intervention by anyone.

I could go on and on, but I expect you get the point.

So when someone says that one or many of these decentralized software applications needs to be regulated or, god forbid, shut down, I wonder the heck they are talking about. I don’t even know what that means.

Of course, using this decentralized technology could be deemed illegal in places and I fully expect that we will see that happen. But we won’t see it happen everywhere. And the places that embrace these new technologies will benefit immensely from them. So, like the criminalization of alcohol and gold, those approaches will eventually fail and will harm those regions that try it relative to the regions that embrace it.

I believe the more productive path for regulators and elected officials is to take the time to understand how this stuff actually works and think about new ways that society can mitigate the risks while gaining the benefits. That’s a harder path but a better path.

#blockchain#crypto

ENS

ENS stands for Ethereum Name Service and it is a decentralized domain name system built on the Ethereum blockchain. You can get domains with the .eth extension by going here, connecting a wallet, and searching and purchasing a domain.

I have purchased fredwilson.eth and avc.eth and a bunch of other .eth domains for my family. It does not cost a lot of ETH to register a domain, but you need to remember to go back and renew it as there is no company/registrar operating a business to do that for you.

An interesting angle on ENS is that the .xyz extensions are interoperable with ENS and that is explained here.

So if you own .xyz domains, you can participate in the ENS system. I also bought fredwilson.xyz and avc.xyz and a bunch of other .xyz domains for my family.

It is interesting to me to see blockchains and smart contracts being used to replicate many of the things we use to build applications on the Internet. Slowly but surely a decentralized infrastructure that mirrors the centralized infrastructure is getting built out.

While there aren’t a lot of things you can do with a ENS domain today, I expect that there will be a lot of things you can do with one in the future. And that is why I think it is a good idea to purchase ENS domains for the ones you own in the .com world.

#blockchain#crypto

Digital Asset Mining In New York State

Digital Asset Mining is shorthand for “proof of work consensus validation of public blockchain infrastructure”. Thankfully we have the shorthand. But it is important to understand what digital asset mining is.

Public blockchains, like Bitcoin and Ethereum, store data securely but publicly in a cooperative ecosystem that is not controlled by any company or government. When you store data on a public blockchain, it is your data, secured by your keys, and nobody can do anything to it without your approval.

That is a big deal and it is the future of all internet data. In time, all software systems will operate on top of secure public blockchains.

The consensus mechanism in public blockchains is the method that they use to cooperatively validate transactions without a controlling party.

Proof of work consensus is when computers all over the world run software (called nodes) and validate transactions and are rewarded with digital assets (tokens).

So proof of work mining and its cousins like proof of stake validating is the foundational infrastructure for the coming architecture for internet data.

Think of Bitcoin mining operations as the next Amazon, Google, and Microsoft Cloud offerings except that they are owned by everyone.

That’s a huge deal. As big of a deal as anything in tech and tech policy right now.

Ok. Now that we’ve had that discussion, let’s talk about a bill under consideration by the New York State Legislature that would put a three-year moratorium on proof of work mining in New York State. I had thought that this bill was going nowhere as of last weekend, but it seems to be back on the table now.

I am a fan of regulation on the emerging blockchain and crypto sectors. Anything as important as the next generation of internet data architecture needs regulation.

But this New York State bill is like using a sledgehammer when what is needed is a scalpel.

Three years is a long time in a fast growing emerging tech sector. The foundational infrastructure for public blockchains is being built now and regions that get going now will have long lasting businesses that provide good jobs and lots of growth. Who wouldn’t want Google, Amazon, and Microsoft operating their data centers in their state? This is the next generation of that.

The issue that has everyone up in arms is the carbon footprint of proof of work mining and that is something that is important to discuss and using regulation to address it makes sense. It may well be that proof of work consensus has no larger carbon footprint than the data centers of the cloud era, but that’s not really the point. We can and should do better. We can have a climate-neutral data architecture when we build the next-generation tech stack.

So here is what I think would be better policy for New York State:

1/ Apply a tax surcharge to digital mining operations in New York State that use fossil fuels to power them.

2/ Use those tax revenues to subsidize digital mining operations in New York State that use clean (renewable, nuclear, etc) energy to power them.

3/ Encourage digital asset mining in New York State with other policies that will bring the data centers here vs elsewhere.

4/ Become the home to the cleanest and largest digital asset mining operations in the world.

We can do that New York State. We just need to want to.

#blockchain#crypto

Scaling Ethereum

One of the biggest challenges for developers building on Ethereum’s market leading smart contract platform/blockchain are the high fees and slow transactions. These issues arise from the fact that the Ethereum blockchain’s current architecture is not particularly scalable.

The Ethereum core developers have been working on these issues for years and there are changes coming in the core Ethereum protocol that will help with scalability. But the broader Ethereum community is not relying entirely on the core developers to address these issues. There are a number of “layer two” solutions that have emerged that will bring very significant increases in speed and lower fees.

One of these layer two solutions, called Zero Knowledge Rollups, is particularly exciting to us at USV and earlier this year we invested in a project called Matter Labs (also known as ZKSync) that has built what we think is the best approach to Rollups on top of Ethereum.

My partner Nick posted today about ZKSync and outlined why we are so excited about this approach. If you are a developer building on Ethereum and are looking for a good layer two solution, you should absolutely read Nick’s post. I would also recommend it for anyone who is invested in or interested in Ethereum as layer two scaling solutions will likely unlock a lot of value in the Ethereum community over the coming years.

#blockchain#crypto

Decentralized Media

Back in the early 2000s, it was exciting to blog and use social networks to create our own media and move away from the traditional media outlets. That was the pull that got me into blogging and got me investing in Twitter. It was a powerful feeling.

But a decade and a half later, it is obvious that we just replaced one type of media company for another and that we don’t really control our own media yet. I have a bit more control over this blog because I run it on my own domain using open source WordPress software, but most people are blogging on Medium or Substack or some other centralized service these days. And the social media platforms, well we know all about them in the wake of recent takedowns. You don’t control your own media platform if you run it on a centralized service.

So a few months ago, I mirrored this blog on Mirror, a decentralized blogging platform. You can view it here.

And yesterday, I claimed @fredwilson on Bitclout with this tweet:

Around that same time, I saw this post on Bitclout:

Here is the thing about blockchains and crypto – the data is public on the blockchain. Nobody controls it other than you with your private keys. And when you put open source software together with that, you get decentralized applications that nobody can mess with, not even the creators of those applications.

I don’t know if Mirror is the new WordPress or if Bitclout is the new Twitter. We will see. But it sure feels like we are back in the early 2000s again, experimenting with decentralizing media. I have the same feeling of excitement I had back then.

#blockchain#crypto#Weblogs

Dapper Labs, Flow, and NBA Top Shot

I have written about all of these things here at AVC before. But I am writing again as there is likely to be a bunch of chatter about Dapper, Flow, and NBA Top Shot as the news of a financing round comes out today.

Financings don’t really interest me but companies do. And this is a fascinating company.

Dapper Labs came out of an incubator called Axiom Zen back in 2017. The Axiom Zen team was looking at interesting things they could build using Ethereum. They contributed to the ERC 721 standard for non-fungible tokens and started building an NFT collectible game that became Cryptokitties. That got our attention and led to a financing that spun out the team and Cryptokitties into Dapper Labs. I wrote a short post on the USV blog announcing that we had invested in Cryptokitties, but in truth, we invested in much more. We are only seeing the entire vision now.

After building a few more collectible experiences on Ethereum, the Dapper Labs team concluded that the NFT experiences they wanted to create needed a different blockchain and they started building Flow. Flow is a proof of stake blockchain that was designed from the ground up for consumer experiences that require scale and performance and more.

And then they started building NBA Top Shot on Flow. That required a deal with the NBA which they made happen a few years ago. And it required Flow to launch. And it required a crypto wallet experience that was tightly integrated into the game that allowed new users to fund their wallets with credit cards in addition to crypto assets. Building all of that was quite a task but they got it all done by the middle of last year and launched NBA Top Shot into beta last summer.

Slowly but surely Dapper let more users into NBA Top Shot and iterated on the experience and by the end of the year, they had a hit on their hands. Hundreds of millions of dollars of transactions a month happen between collectors on NBA Top Shot. Pack drops sell out more or less instantly.

The success of NBA Top Shot has led many developers to Flow seeking to build additional collectible experiences and I expect that we will see many more great games and experiences on Flow in the coming months and years.

It is rare in the crypto sector to find a team that has successfully launched a blockchain, a wallet, and a number of popular applications. The Dapper team has done all of that and I am excited to watch what they do next.

#blockchain#crypto#digital collectibles#Games

How Not To Regulate Innovation

The Secretary Of Treasury, in his last month in office, is giving us a textbook case of how not to regulate important technology innovation. The issue is “unhosted wallets” and how regulated exchanges and other “hosted wallets” interact with them.

Let’s start with why this is important. Our current financial systems are old, creaky, expensive, and do not serve enough people. According to a 2017 survey by the FDIC, 25 percent of U.S. households are unbanked or underbanked. That is close to 100mm people, mostly black and brown. This is a big deal. This is a piece of the structural inequity that exists in the US and around the world.

Technology can, will, and should change this. When a bank account can simply be a wallet on our phone or computer, it should be massively less expensive and much easier for anyone to have one. And when that wallet can connect to any other wallet or bank and send, receive, sell, buy, etc, as easily as a browser can connect to AVC.com, then you have the architecture for an open financial system that is several orders of magnitude less expensive and more available than what we currently have.

What I have just described is how blockchains and cryptocurrencies work today. You can download a cryptocurrency wallet onto your phone, you can send some Ethereum to it from your Coinbase account in the cloud (called a “hosted wallet” and/or “exchange”), and then you can send that Ethereum to anyone else using any other crypto wallet. All of this is built upon open protocols in the same way that the web was built on open protocols. It is completely and totally interoperable, like the web or email, unlike our current financial system.

The crypto sector is building a new financial system, that requires much fewer “middlemen” taking a piece of the transaction, that anyone can adopt and use by simply downloading some software onto their phone, and that is secured with state of the art technology.

But the Treasury Secretary and his advisors are concerned about bad actors using this new open global financial system to do bad things. That is a legitimate concern, but it turns out that only about 2% of transactions that go between regulated exchanges and hosted wallets and unhosted wallets are “illicit” according to Chainalysis.

So in late December, the Treasury Department issued a notice of proposed rulemaking seeking to make the rules around sending cryptocurrencies to unhosted wallets much more restrictive than cash.

The notice of proposed rulemaking is a long-standing approach to regulating new things. But this notice of rulemaking is not like any other. It was shortened to 15 days from the customary “at least 30 days and often much longer” and it was issued in late December making comments due yesterday. That means that comments were due over two holiday weeks in the midst of a global pandemic. And then the Treasury Department intends to wade through all of those comments and issue a rule before it leaves office in a couple of weeks.

That is madness and no way to regulate an issue at the very heart of a new open financial system that is poised to open access and massively reduce the cost of financial services for everyone.

One can only come to one conclusion about the Secretary’s intentions here and it is that this was done intentionally to stifle debate and discussion and jam bad regulation through on his way out of the door.

USV and many others in the tech sector, venture capital sector, and crypto sector have issued comment letters opposing this rulemaking. Our comment letter is here:

I hope the Secretary and his advisors come to their senses and realize that this is no way to regulate important new technology. This would be a terrible legacy to leave office with.

#blockchain#crypto#policy#Politics

NBA, NBA Top Shot, and Intangible Market

The NBA is back in business. Our family watched a ton of basketball over the long weekend including the Knicks huge win over the Bucks last night. It’s great to have my favorite sport back in action after a short layoff.

Also back in action is NBA Top Shot, the digital trading card game from the NBA and our portfolio company Dapper Labs. New packs will be dropped in the new year featuring all stars, rookies, and more.

But you can shop right now in the marketplace and buy cards from other players.

The trading opportunities in NBA Top Shot are exciting. I have purchased 11 packs since the game launched, for about $250 in cash and crypto. I have sold a few cards and now hold 61 “moments” that are estimated to be worth about $2800.

That estimate comes from a third-party app called Intangible Market that allows crypto collectors to estimate the value of their collections.

Intangible Market is an example of why building games and other experiences on crypto blockchains is so exciting. It means that others can build on top of your work and make it even more fun and interesting to use and play.

Crypto has a built in business model, tokens, that means that these platforms can be open to everyone to build on and enhance and evolve. That is radically different from the web and mobile ecosystems of the last twenty-five years and why developing on crypto is such an exciting and wide open opportunity right now.

#blockchain#crypto#digital collectibles#Sports

Innovation In Capital Markets

A few years ago, maybe in 2016, we held a discussion of blockchain and crypto technologies at the annual meeting of our limited partners. I recall someone in the audience suggesting that the NYSE and Nasdaq could rebuild their markets on top of these technologies. I replied that I thought it was more likely that new markets built on blockchains and existing for crypto assets would emerge to compete with them.

And here we are, with a 24×7 global marketplace for crypto assets that has a market capitalization of over half a trillion and daily volumes in the hundreds of billions. This pales in comparison to the legacy capital markets, but that is always the case with a new entrant on the scene.

The legacy capital markets are not sitting still. There is real innovation happening in the IPO process for example.

But if you want to see the world we are headed into, I think it is better to look at the crypto markets. They operate day and night, they are global, and anyone can buy, sell, hold, and send these assets as long as they have a crypto wallet and a browser or a phone. You don’t have to be wealthy to invest in crypto startups. Anyone can do it.

The crypto markets are also innovating in areas like lockups, vesting, and governance. In a traditional IPO, the existing shareholders are typically locked up for 180 days and then the lockups come off entirely. In the crypto markets, we see all sorts of different forms of vesting and lockups being tried. What is emerging are lockups for existing holders that are much longer, but with small amounts of early and regular liquidity.

We are also seeing a lot of innovation around governance, with crypto projects working on ways to allow the community of token holders to have real say in the way a crypto project operates. We have seen a number of communities make very significant changes in things like total supply of tokens, inflation rates, and technology roadmaps in recent months. I cannot think of a public company that allows its shareholders that level of impact on their direction.

Right now these markets are operating as parallel universes, but I don’t think that will be the case forever. It is fairly simple to tokenize equity securities and trade the tokenized version in the crypto markets. That is not really happening just yet, but I expect that it will in the not too distant future. Then we will have the opportunity to see two identical assets trade in the traditional and emerging markets. There will be arbitrage opportunities and more when this happens and the new markets will put pressure on the traditional markets to adapt and change and evolve as fast as they can. That will be hard, if not impossible.

The global nature of the crypto markets is also a challenge for regulators, who have stood in the way of innovation and continue to do so. Why, for example, does one have to be wealthy to invest in startups in the US? That’s simply a way to keep the wealthy rich and everyone else not rich. If you trade crypto assets and something is not available in the US, you can trade or lend or stake elsewhere. And many/most do that. This allows innovation to happen in crypto even when some jurisdictions, like the US, are slow to embrace and hostile toward innovation in capital markets.

So if you want to see the future of capital markets look here, not there. That’s where all of the innovation, experimentation, and new stuff is happening.

#blockchain#crypto#hacking finance#stocks