The revolution in cryptography has caused a great unbundling of the roles of money, promising to reverse the doldrums of the Google Age, which has been an epoch of bundling together, aggregating, all the digital assets of the world.
Bundling reflects Coase’s Law: Companies expand until the costs of performing a transaction inside the firm exceed the costs of performing it outside. Don and Alex Tapscott point out that this law works both ways: Companies that find the costs of internal operations exceed the costs of outsourcing should cut back, shrink their reach, and spin out operations. In a word, unbundle.1
Adding a technological argument to Coase, Clayton Christensen shows that integration—essentially bundling components together in a seamless system—is desirable as long as a technology falls short of a market need. All interfaces between components must be optimized to the point that the market need is satisfied. Then, where suboptimal performance satisfies the market, modularity—using standardized interfaces and components—will reduce costs and expand market share.2
In the bitcoin blockchain, companies accept cumbersome solutions constantly distributing a 120-gigabyte ledger across the network when most of the functions could be performed ten thousand times more efficiently within a single company hierarchy. Why would companies do this? The purpose of incurring the costs of the chain is to address the doldrums of centralization, insecurity, and sclerosis afflicting the current information economy.
The New York Times blames most of the ailments of our economy—slow GDP growth, low productivity, even declining childbirth—on the diversion of resources into cryptocurrencies.3 But crypto-innovation addresses the entrepreneurial doldrums signified by declining business starts and IPOs and the immense diversion of resources represented by the $5.1 trillion a day of otiose currency trading. It addresses the security crisis with a new Internet architecture. By disintermediating transactions, cryptocurrencies also offer a remedy for the hypertrophy of finance—up near 40 percent of business profits—that has also coincided with the decline of GDP growth.4
Companies are abandoning hierarchy and pursuing heterarchy because, as the Tapscotts put it, “blockchain technology offers a credible and effective means not only of cutting out intermediaries, but also of radically lowering transaction costs, turning firms into networks, distributing economic power, and enabling both wealth creation and a more prosperous future.”5
Bitcoin aimed to burst the overstuffed $5.1 trillion daily piñata of modern currencies and unleash a crypto-copia. But the units of account—the monetary measuring sticks—remained in the world of fiat and gold. So bitcoin’s key current role is to contribute the technology of blockchains to the world.
In the Great Unbundling, the blockchain generates tokens of functionality (from BAT for attention to GNT for supercomputing, to RNDR for graphics processing functions). It creates mediums of exchange (bitcoin, ether, Monero, Zcash), stores of value (bitcoin, ether, and others), rivets of security (Blockstack, Rivetz), software languages (Solidity, Golem), and measures of wealth. It has even produced “stablecoins” to serve as units of account, or real money (DigixDAO’s DGX and Emergent’s G-Coin, tied to gold bullion, and Tether, tied to the dollar). And then, the blockchain movement developed ways to mediate between these various tokens, forms, and facets of funds, such as Ripple’s XRP, Bancor, and TREZOR.
With the roles of money largely unbundled, unbundled too will be the increasing agglomerations of economic power. Financial conglomerates are breaking into transactions, loans, crowdfunds, and crypto-assets. Content promises to escape its confinement in the giant silos of Google, Amazon, and their rivals and distribute itself across the Net again, with digital rights management incorporated in the blockchain.
Most important, the crypto movement led by bitcoin has reasserted the principle of scarcity, unveiling the fallacy of the prodigal free goods and free money of the Google era. Made obsolete will be all the lavish Google prodigies given away and Google mines and minuses promoted as ads, as well as Google Minds fantasizing superminds in conscious machines.
Scientists have always understood the crucial role of measurement in trade and industry. The new movement is rooted in the primacy and scarcity of time in all measuring sticks and economics. The world’s builders and creators, launching their adventures from zero to one, summon components from every corner of the globe. That entails interoperating these components—chip designs from Tel Aviv to be inscribed on silicon in a foundry in Taiwan to fit in circuit boards in Palo Alto and manufactured into systems in Shenzhen and marketed in Cupertino. For these integrated products to function together, their makers must trust in immutable systems of measurement, often down to picometers and picoseconds.
The International System of Units (abbreviated “SI” from the French Système internationale) has established seven key metrics, each founded on a constant of physics: the second of time, the meter of length, the kilogram of weight, the degree Kelvin of thermodynamic temperature, the ampere of electrical current, the mole of molecular mass, and the candela of luminosity. These measures cannot float because their constancy underlies and interconnects all the worldwide welter of human industry that keeps us alive and prosperous.
Throughout human history, people have understood that money plays a key role as a measuring stick. Contrary to Craig Wright’s fervent view, currencies are not commodities, part of what they measure. Measuring sticks cannot be part of what they calibrate. They must have their roots in a grid of measurement beyond the reach of commerce. Self-referential loops—whether physicists measuring atoms with atoms, or philosophers gauging minds with minds, or economists measuring commodities with commodities—doom their users to Gödelian futility.
The SI regime confirms that fundamental to all immutable standards of measure is time. All seven key units rely on physical constants, frequencies, and wavelengths that are bounded in one way or another by the passage of time. As the only irreversible element in the universe, with directionality imparted by thermodynamic entropy, time is the ultimate frame of reference for all measured values.
As Roberto Unger and Lee Smolin write in The Singular Universe and the Reality of Time, “Time is real. Indeed, it is the most real feature of the world . . . by which we mean that it does not emerge from any other aspect of nature. . . . Time does not emerge from space, although space may emerge from time.”
Economic life is subject to this reality. Governed by the speed of light and the span of life, all commerce must obey the cadence of the cosmos as well as the cycles of the clock.
The Google era is coming to an end because Google tries to cheat the constraints of economic scarcity and security by making its goods and services free. Google’s Free World is a way of brazenly defying the centrality of time in economics and reaching beyond the wallets of its customers directly to seize their time.
The Siren Servers of finance and artificial intelligence also attempt to cheat the scarcity of time by multiplying transactions and accelerating algorithms beyond the inexorable boundaries of the speed of light and the span of life. The uncanny success of quants in finance does not express a new and deeper understanding of the realities of companies and technologies. It merely moves to a time scale beyond actual transactions and valuation metrics in the world.
Derivatives, exchange traded funds, and other specious forms of liquidity, writes Mervyn King, the former governor of the Bank of England, “separated the scale of bank balance sheets from the scale of real household business activities. . . . Lending to companies is limited by the amount they wish to borrow [but] there is no corresponding limit on the volume of transactions in derivative financial instruments.” Like the aliens in the Star Trek tale “Wink of an Eye,” invisible because they occupy an accelerated time scale that allows them to dominate human beings, the flash boys on both coasts operate beyond the real chronology, the cadence of the cosmos.6
In the same way, so-called artificial super-intelligence does not succeed by a deeper understanding o
f the games of Go, chess, or Atari, to cite its most fashionable examples. Super AI succeeds by vastly accelerating the speed of game-playing, capturing much of the possibility space of a bounded and deterministic regime. Take it to an unbounded and non-deterministic realm, such as self-driving cars or general-purpose robots, and it will ultimately fail without new sensory systems and human guidance.
By reestablishing the connections between computation, finance, and AI on the inexorable metrics of time and space, the great unbundling of the blockchain movement can restore economic reality. Crucial will be the emergence from the crypto-welter of metrics tied to the scarcity of unfolding time. Satoshi was correct in mimicking gold, but because he did not fully grasp the sources of gold’s success, he erred in his parameters for bitcoin.
Satoshi’s error provides opportunities for others only to the extent that they grasp the nature of money and time. Surveying the scene, from Ethereum to Cardano to Hedera to Blockstack and on and on, it is unclear which solutions can work. But we can be confident that amid the cornucopian creativity of the new crypto world, full solutions to the problems of money are being developed. Let us hope that the solutions will come without geopolitical chaos stemming from a series of new financial crises.
Here are the key projects, joined almost daily by new rivals in creativity.
Bitcoin, ten years old, is the first, with the highest market cap and the most robust and tested blockchain. It can serve as a store of value and a vessel for major international transactions. With a 21-million-unit cap, it is not a stable unit of account. Focusing on security, its “script” language is serviceable but not Turing-complete, lacking recursive loops. So it is limited in its ability to accommodate smart contracts, but limited also in its vulnerability to hacks. Its Lightening extension gives it potential scalability for smaller transactions. Its key figures are Satoshi and Nick Szabo, who foreshadowed it with bit gold.
Ethereum, seven years old, is still the most versatile platform for smart contracts and initial coin offerings. Its software language, Solidity, is Turing-complete. Its coin—ether—commands the second-highest market cap among cryptocurrencies. Its “gas” metric specifying payments for use of energy in computation shields the system against spam and denial of service attacks. But responsive to computer advances, gas does not make ether a stable unit of account. Ethereum’s leader, Vitalik Buterin, is perhaps the most impressive figure so far produced in the cryptocosm. Others involved with Ethereum’s early development include departed co-founder Charles Hoskinson.
Bitmain, a miracle-working Chinese startup, started designing application specific integrated circuits (ASICs) for bitcoin mining in 2012. Five years later, in 2017, it apparently eclipsed Nvidia as the world’s most profitable chip producer, with reported profits of near $4 billion. Bitmain’s ASICs perform peta-hashes a second—that’s 1015, or thousands of tera-hashes—which by this measure make them the world’s most powerful computing devices. Under pressure from the Chinese government, Bitmain has since metastasized around the globe and launched a division to build artificial intelligence and machine-learning devices. Don’t bet against them.
Blockstack has been in operation on the Net for four years, with hundreds of thousands of users. It is a platform for security and identity for a new distributed Internet. It provides a domain name service rooted in the bitcoin blockchain, a $25 million venture fund, and a scalable model that reserves the blockchain for pointers to memory addresses rather than for data storage itself. It thus uses the blockchain for what a blockchain can offer—security, identity, and trust—while freeing the blockchain from what it cannot offer—huge transaction speeds and storage space. Its key figures are Muneeb Ali, Ryan Shea, Luke Nelson, and Michael J. Freedman of Princeton.
NEO is an Ethereum rival that is dominant in China. A kind of operating system for On-Chain, China’s hyperledger project to make businesses compliant with regulatory regimes, NEO’s CEO, Hong Fei, is politically savvy. The source of DNA (China’s “distributed network architecture”), NEO is the foundation for a smart contract platform adaptable to the politics of Asia, which despite political resistance is arguably still at the heart of the crypto movement.
Cardano, in preparation around the globe, is named after Girolamo Cardano, who originated probability theory in the sixteenth century. The creation of Charles Hoskinson, first CEO of Ethereum and Bitshares, it is written in the innovative but onerous Haskell language. Using software based on mathematical functions, it is verifiable through formal mathematical methods. It seeks to be scalable (generating new resources as it expands), testable, and sustainable. Hoskinson is focused on doing things right—peer review, verifiable code, algorithmic rigor—but more important is doing the right things. Cardano may not know the difference.
EOS is the third major project launched by the nimble crypto-vet Dan Larimer, following Steemit (a Reddit-style blockchain) and BitShares (a distributed exchange started with Hoskinson). Steemit and BitShares are still said to account for a large share of all blockchain “transactions,” but since they are mostly free, it is hard to tell what that means. EOS promises a new smart contract platform that is free and programmable in conventional languages such as Java and the C-world. It is in the process of a fundraising trajectory that may be on track to exceed a billion dollars before it ends. A learned libertarian, Larimer should concentrate his public statements more on the virtues of his software and less on the supposedly crippling defects and personal foibles of his competitors.
IOTA is not a blockchain at all but a tangle of chained transactions where each transactor verifies two other transactions to qualify his own. Stemming from a community of crypto geeks in Norway, it aims to be hugely scalable and adaptable for an Internet of Things. Money seems to be pouring in.
Other representatives of the post-bitcoin crypto-movement include RaiBlocks, which depicts itself as a hashgraph for people rather than things, and my own favorite, Jonetix of Cupertino. Started by Paul Wu, formerly of Intel, and Nick Tredennick, it has invented an unbreakable cryptochain for the IoT that generates its private keys from the random motions of molecules in chip substrates.7
Perhaps the most formidable new player is Hashgraph, launched by a Texas company long in stealth called Swirlds (“shared worlds”).8 A heralded scheme invented by the mathematician Leemon Baird of Carnegie Mellon, it claims to compete with all blockchains and to be unrelated to blockchain technology. But it, and its new public offspring Hedera, come from the same cryptocosm as the blockchains it aims to replace.
Using many of the same crypto-tools pioneered by bitcoin, Hashgraph dubs its blocks “rounds.” But they still entail compiling a bunch of transactions, hashing them into the root of a “Merkle tree” and then appending them to a chain. As the Hedera white paper puts it, “At the end of each round, each node calculates the shared state after processing all the transactions that were received in that round and before. It then digitally signs a hash of that shared state, puts it in a transaction and ‘gossips’ it out to the community.”9
This is just what Satoshi prescribed for bitcoin, which also uses a “gossip protocol” to propagate the state of the system and a Merkle tree to hash the individual blocks. Hashgraph describes the chain as “public key addresses”; this is the essence of the bitcoin chain as well. And just as with bitcoin, the addresses run back to a “Genesis.” Whether it is a “Genesis block” or “Genesis round” is merely a matter of whether you eat the apple or swallow the Leemon.
What Leemon Baird invented is a new consensus mechanism that aims to replace the laborious proof-of-work mining operations of bitcoin and Ethereum and eliminate the incidental forks in their processes. Although it also claims to target the many brands of “proof-of-stake” with its own “winner-take-all” temptations, Hashgraph contains a proof-of-stake mechanism of its own. “Each node casts one vote for each coin of Hedera currency” that it holds.10
The vital invention is called “virtual voting,” whereby the memo
ry in each node bears a graph of the hashes of transactions reported to it by other nodes in the universal gossip process. No actual voting has to take place, because the hash graph on every node collects sufficient information to order and reconcile all the transactions objectively in time. The gossip process of propagating information also provides a consensus on the state of the system, without any further communication. If it works—and no one has proved that it doesn’t—this virtual voting system is a coup, a faster and better mousetrap, and it is catching a lot of mice (national credit unions, healthcare systems, and still unnamed big banks).
The public Hedera, however, is part of a centralized system—a Hashgraph consortium and council—run by a group of thirty-nine “known and reputable global organizations.” Based on the Visa model, the council can revise the software and the rules, a feature that changes the nature of the beast. The pivotal question is whether its management will choose a stable coin model (gold or other truly “time”-based scarcity) or whether it will tether to the dollar or to an indirect fiat model, such as commodities, in a self-referential loop. Many of its “reputable institutions” will presumably prefer the failed models of the existing system.
In contrast to other cryptocurrencies, Hedera lacks open-source programmability, immutability, and time stamped permanence of records, but it is a galvanic and scalable invention that will make its mark. Making no change to the Internet architecture, it poses relatively little threat to the established order. But it will accommodate any form of smart contract or other application on top. It is programmable not only in Java but also in Ethereum’s Solidity.11
Since “stablecoins” will ultimately dominate the currency space as measuring sticks, one of the most intriguing of the projects is the DigixDAO, another Chinese company. The first ICO on the Ethereum blockchain, it surprised the world by raising $5.5 million in a day. The DXC is a coin based on gold bullion, mined in humane ways, and registered on a blockchain. Outperforming all other crypto-assets during the carnage of early 2018, DigixDAO might have proved its point that a tie to gold can enable a stablecoin to serve as a unit of account.
Life After Google Page 26