Fundamentally, blockchain lets you write code that makes strong commitments about how it will behave in the future.
To give you an example, the most obvious one is Bitcoin. So Bitcoin, to the extent it has value, is enabled by the scarcity of Bitcoins. There will only ever be 21 million Bitcoins. That property of saying there's only going to be 21 million is guaranteed by the blockchain. It is not guaranteed by the creators of Bitcoin. It's not guaranteed by the developers of Bitcoin, by Satoshi Nakamoto. It's guaranteed by the very network architecture. That has never existed before.
Before, if Google said I'm going to have Google Coin and Google Coin will only have 21 million coins, they could just change that. Every server that runs at Facebook and Google and Amazon, that's just controlled by some person, ultimately, and that person can change the rules.
And by the way, it has all sorts of consequences, including the fact that no one has ever created a digital currency prior to Bitcoin that anyone really at large believed in. And that's part of why they didn't believe in it because they said, "Oh, you'll just change the rules. Why would I believe that this is really fundamentally scarce?"
Bitcoin guarantees that if you own a Bitcoin, and you have the private key, it's your Bitcoin. It guarantees only 21 million Bitcoins will ever exist. It guarantees you can't double spend a Bitcoin. It makes various guarantees that are essential to that system, for those coins to have value.
But that's only one of the things you can guarantee. You can do other things. You can guarantee if you own a good, an NFT, if I go and buy this digital good, this piece of art, this Top Shot basketball card, I truly own it. It doesn't matter if the company behind it changes their mind. They can't go and change the take rate or charge you more rent or take it away from you.
Here, the user controls it and that's guaranteed by the blockchain.
If you kind of go back in the history of tech, you can ask questions like why was the web so successful? One of the reasons the web, the early web - 90s web, the internet - was so successful was because it was built on open protocols. So it made implicit commitments to developers. Because there were open protocols, it was a level playing field upon which entrepreneurs could build. There was a massive wave of innovation, investment, et cetera because people knew this was a level playing field.
It's kind of analogous to you're more likely to invest in a country like the United States where you feel like there's a consistent rule of law than you are in, let's call it a developing country with a dictatorship where they might just privatize the assets. It's just a basic rule of economics that people are more willing to invest and spend time and money on platforms or countries or whatever your analogy is where there's predictable rules. The web had predictable rules, and blockchain does too.
There's a long, long history of platforms changing the rules, changing the take rates, changing the APIs, et cetera. With blockchains it's like the web was. It's a predictable, consistent set of rules that simply can't change. We like to say, "Instead of don't be evil, it can't be evil." It cannot change the rules.
The obvious one is performance. So if you go try to buy an NFT today on a, we're investors in OpenSea as an example, which is a big NFT marketplace, or you go try to create one, you'll have these things called 'gas fees'. And the gas fees can be quite expensive, like $10 or something to do a transaction. And those gas fees essentially are paying for the overhead of running all these computers.
So a blockchain inherently by design takes a performance hit versus a non-blockchain computer.
And why is that?
Because the very architecture of a blockchain is the core concept is you don't trust a single computer because a single computer can turn evil. And so what you do is you create this game theoretic mechanism, it's called a consensus mechanism, where all those individual computers, any one of which could turn evil, come together every 10 seconds, depends on the system, but let's say 10 seconds, and they vote on the state of the overall system. And the system is designed using game theory in a way that the system as a whole is resilient to any significant portion of the individual computers turning evil.
That just requires overhead because you're using a whole bunch of computers to act like one computer. That takes a performance hit. Today, it takes a pretty heavy performance hit and I think it will always take a performance hit.
I don't think there's ever a world where you'd want to have everything on a blockchain. If you want to go and do a Web2 like action, you want to go read a piece of text or download a graphic or something, the current architecture is the right way to do it.
I think there will be a very interesting hybrid architecture. At the part of the application where you're holding the money, you'd use a blockchain. At the part of the application where you're just displaying images, you don't use a blockchain. And there's interesting hybrid architectures that people are exploring. It's not going to replace Google or Amazon Web Services or something like traditional infrastructure. I think it complements it.
I remember Steve Jobs had that great quote where he said, "Computers are like trucks. You're always going to have trucks. You're going to have cars. You're going to have trucks. Phones are cars, and you're always going to have trucks." It was a great analogy because we think of desktop computing now as kind of more around the work day and mobile sort of the evening or something. There'll be some kind of split like that with blockchains and non-blockchains, I think.
Obviously, it all started with Bitcoin 12-plus years ago. Ethereum, I think it was launched in 2015. It was announced 2014. Up until then, you had Bitcoin. You had a few forks of Bitcoin that were just kind of like variants on the same things, a doge coin, light coin, et cetera.
The basic application at that point was what Bitcoin is today. A censorship resistant store of value, so sort of a digital gold, if you will. Bitcoin stayed very consistent in that way. There were people, I was sort of one of them, that wanted Bitcoin, the core Bitcoin to evolve and to, for example, have a more advanced programming language to enable things like NFTs.
The origins of Ethereum, I remember the first time I met Vitalik, it was 2013, and he was basically trying to build NFTs on, it was called Colored Coins. They were on top of Bitcoin. For a variety of reasons there was sort of this schism in the Bitcoin world that led to these forks and other things.
Essentially, it was around this question around the vision for what Bitcoin should be. Basically, the people that wanted it to become digital gold won that battle, and the people that wanted it to be more programmable and have divisions of things like NFT and DeFi went over to the Ethereum world.
Philosophically, Bitcoin is very, very conservative for a very good reason, which is it's all about trust and security, reliability, and therefore, from a development point of view, they're conservative. They don't add that much. They don't change it that much. It has a limited programming language that is extremely limited, and that's on purpose for security reasons.
Ethereum is the opposite. Ethereum is a very expressive language. It's very similar to JavaScript, the most popular programming language in the world. You can write, really, a broad range of applications. And they're doing a complete overhaul of the system. So you may hear about the environmental impact of what's called proof of work mining, which is what Ethereum uses today but they're switching to proof of stake.
This is a dramatic change in the system, and that will happen probably in the next 12 months. It'll answer all of the questions for people concerned about its environmental impact, and also, it'll improve the performance of the system and security and a bunch of other things. It’s a radically different approach to software development, more Silicon Valley-like, frankly, and much more rapid.
We don't know who Satoshi is but I think something like 5% (or some significant portion) of Bitcoins are owned by Satoshi, or at least the original person who created the system. You can have community ownership, you can have network alignment. Users can own part of the system. It's completely consistent with capitalism and with the creators and developers owning parts.
All of the entrepreneurs that we work with have tokens in the system they create. But it's just a different model. It's kind of analogous to something like real estate. If you go read about just the way they used to build cities and things, a lot of times what happened is the developer would go and try to create essentially a network, to try to create, get restaurants, get houses, get businesses.
And the way they'd make money is if they owned a chunk of land. And as that network grew, more people came there. The value of the land would go up. It's sort of similar to that. They just own a chunk of the network, of the tokens. So it's very much community owned and operated networks, but that's completely compatible with rewarding the people that took early risk, and the investors like us.
So social tokens like BitClout, Rally, Roll - the idea is to have a token associated with either a person or community associated with a person.
So the way I think of it is the internet now consists of big networks like Twitter and Facebook, but really like millions of smaller networks; Twitch streamers, and YouTube influencers, and there's all of these new sub-networks.
And so maybe we can talk about Rally, which I think highlights this in a clearer way.
The way it works in rally is like a Twitch streamer, for example, can have their own token. So they can have, if I were a Twitch streamer, Chris Dixon Coin or something like this. And then that token can be used for multiple things.
It can be used as a little in network currency. If people want to donate to each other, for example, or the creator wants to sell things, they can sell physical merchandise, they can create NFTs and sell those. It can also be used for access.
So if you go to Rally, a bunch of these tokens are used for behind the scenes Discord, behind the scenes shows, and you have to have a certain number of the coins to get access to those.
The other interesting is it can be used for another purpose, which is for an investment. You have people that may want to buy the coins because they themselves are fans or because they believe this is, let's say, an up and coming band. It's a little bit, I think, analogous in this way too if you talk about NFTs, NBA Top Shot is this very popular NFT collecting game. And same with baseball cards and traditional collecting. You have multiple motivations. You have some people that are buying the card because they love it and they want to hold it. And you have other people who are more investment oriented.
But the different interests play well together. Because what happens is if you have an up-and-coming band at first, maybe somebody who's more of an investor type will go and invest in the band and try to hope that the token goes up, which then injects more money into the system, which then helps, let's say, fund the musician. And the musician can then, instead of relying on a record label, can then have money to go create music and quit their job, and then that in turn makes them more successful. So you get this nice flywheel effect.
I think the social token concept, it's very early right now, but I think, I believe, if you ask me, what's the next thing that could really get big in crypto? I think that would be high on my list.
A lot of this comes from video games. I think video games, particularly the most advanced ones like Fortnite and Roblox, I think they're on the cutting edge of design patterns that will be adopted much more broadly on the internet and much more broadly in the media world.
What was the business model of video games 20 years ago? You buy a CD to play Madden or whatever. Later on, you could download it and pay for it. But the modern games now, the games are free. You can play Fortnite for free. League of Legends is free. Roblox is free. Fortnite is completely free. And not only that, some people for a while were saying, "Oh, it's free, but you have to pay for multiplayer." Fortnite multiplayer is free too. And you can play the whole thing, you can be the best in the world, you can play all day completely free.
What do you pay for? You pay for skins, emotes, basically virtual goods. But that's the modern model of these video games. And they have, in them, they have two things.
They have their own currency, so Fortnite has V-Bucks, and then they have digital goods you can buy with that currency. I think that model will be replicated throughout the internet. And this will be the model that you use as a podcaster, as an influencer, as a streamer, whatever it might be, musician. They'll have their own little currency and they'll have their own set of digital goods, NFTs, and some will be physical and some will be virtual.
Social tokens and NFTs are essentially the insights from the video game world and the software world now propagating out to the rest of the world.
What is a DAO? So, basically, a bunch of people on the internet got together and said, "Hey, we should get together, and pool our money together, and buy something – like an NFT."
A DAO is just a set of smart contracts on Ethereum. There's no company but the smart contracts enforce the deal. So the smart contracts say, "You put money in, and then together, we're going to use that money, and we're going to go buy this NFT." You can add onto it, by the way, things like anyone who puts money in gets a token out. And so they kind of own a piece of the DAO, sort of like a company. You can add any logic you want it. It's just code.
Think about what happened with stuff on GameStop on Reddit. That was a group of people getting together, and just sort of ad hoc deciding to go and buy the stock. What if there was a set of code that let them come up with rules, that said, "Hey, if you join this group, you get a token or something to show that you joined, and then you can vote, using that token, on what the group does. But we're all going to do it together."
So it's this way to kind of enforce this collective action together, which is what a company is. This is just a modern way to do it, using code. It's very early but I think that someday a DAO might just ... Maybe they'll buy a basketball team. It's like the Green Bay Packers, I think they're the ones that are owned by the people in the city or something.
I think that the GameStop thing might just be a canary in the coal mine. DAOs are the way to really scale that collective action out, so that people can do all sorts of interesting things. You could argue a lot of problems in the world are collective action problems. Things around, I don't know, energy consumption and, I don't know, the tragedy of the commons with public infrastructure.
There's just a whole bunch of things where if you had new ways to coordinate groups of people, coordinate money, coordinate effort and activities, things might improve.
I think it’s a new way to finance creative activity. By the way, I define that very broadly. I mean, there's the traditional creative things of writing and art, visual art and music, but there's also writing code, open source code.
And what will the structure of the internet be in future? Is it going to be four companies? Is it going to be like TV was, where there are four big channels and they control everything? And we spend the next 50 years of congressional hearings, about trying to reign them in and regulate them? Or is it going to go back to its roots? Is it going to send the power out to the edges?
I don’t think it's overstating it to say that the internet is the most important invention of the 21st century, or 20th, 21st century. And the questions that we're discussing today are about how is that system governed, and how does the money flow in the power flow through that system?
So I think, when you phrase it that way, that's probably no more important question than how power and money works on the internet.
What are the capital structures? What's the market structure? What's the economic models? They'll start off small and silly. I wrote this blog post, I guess a decade ago, called The Next Big Thing Starts Out Looking Like A Toy. I made the observation that so many technologies throughout history start off looking kind of silly but then it gets better and better and grows. The early telephone barely worked and went less than a mile. But these things get better. And you have to project out how they grow.
I think that's what this is really about. It's about power and money on the internet. Who has that? How has it governed? How is it controlled? How does the money flow? What's the economic model? Those are really important questions. This is why crypto and blockchains matter.
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