The TCP/IP Of Money Mirage #ripple #stellar #blockstream #ethereum

“Strange days have found us
Strange days have tracked us down
They’re going to destroy
Our casual joys
We shall go on playing
Or find a new town”

The Doors.

Strange Days Stories:

  • # 1 Ethereum raised about $15m using crowdfunding, without Angels or VCs in a matter of weeks before they had built a product (ie the real Seed stage).
  • # 2 Blockstream has $21m of VC funding and the VCs have to at least proclaim that they don’t expect economic returns.

Then there is Ripple. Nobody has declared Ripple dead, but it’s founder has left saying he got it wrong. OK, so that is failed Bitcoin bet, nothing new there. Actually the funding history does look strange. There were two rounds billed as Angel, but all the investors are institutions. Then after two Angel rounds, there is a Seed round. I now officially declare:

“the names given to funding rounds are utterly meaningless and should be relegated to the dustbin of history”.

Then there is Stellar, which is billed as Ripple done right. The same guy who built Ripple and then declared it a failure got backed in a big round to “get it right this time”. Tolerance of failure is a good thing; it is a key factor in the success of the Silicon Valley model. However one expects at least a decent interval when the entrepreneur is “out in the wilderness” learning and reflecting.

The mirage that is beguiling investors is a logic that goes like this:

  • The winners at the bottom of the stack are the big wins. Look at Microsoft and Intel.
  • In the Internet era, the bottom of the stack is TCP/IP.
  • Bitcoin is the TCP/IP of money.
  • We cannot invest in the underlying Bitcoin technology, because it is open source.
  • So we will find something else at that layer to invest in.

I call this a mirage for the simple reason that we will never have anything like the Wintel era (i.e. a whole generation of technology controlled by two companies with proprietary technology). Nobody controlled TCP/IP.

Nobody will control the TCP/IP of money.

Although nobody controlled TCP/IP, $ billions of value was created at layers above TCP/IP. The same will be true of the TCP/IP of money. This layer will be totally free and open source. Almost everybody understands this. You can create huge economic value at the layer where you add value to merchants and consumers (eg Coinbase and Bitpay). So why are VCs even bothering at this lower TCP/IP like layer? The only logical reasons I I can see are:

  1. The lottery ticket approach – a small bet on the remote chance of a massive outcome. This seems to explain the bets on Ripple and Stellar. The conversation here seems to be:

“It is unlikely that we can control the TCP/IP of money layer, but if we did the payoff is so massive that it is sensible to bet a few $ million on the possibility of that outcome”.

  1. The Deus Ex Machina approach. This seems to explain the Blockstream investment. The conversation here seems to be:

“The Bitcoin ecosystem is threatened by fundamental issues related to mining (such as the 51% attack”). That could put the $ billions in value creation at risk. By putting in a few $ millions we protect the ecosystem and our ability to make money further up the stack and by working at this layer of the stack we create unique insights and connections”.

The Deus Ex Machina approach is no stranger than a BigCo like IBM contributing to open source in the knowledge that they make money at the layer above. I believe the Blockstream investors are sincere in wanting to protect the ecosystem because they have a lot at stake in that ecosystem.

I think Ethereum is the platform to bet on. It is clearly not yet delivered, so the proof of the pudding will be in the eating. However their direction is right and they have the developers and funding to deliver on the promise. Ethereum is totally open source and their funding means they don’t have to deliver economic returns to shareholders. This means that developers can build on top without worry. Ethereum is more than platform for payment networks. That is certainly one very big use case. but it is also a platform for any kind of transaction. Fundamentally, Ethereum is a platform that enables the Internet to get back to its decentralized roots and the implications of that are big and not confined to Fintech. The fact that Ethereum was funded through a currency sale is a non-issue in my opinion. Ether (that currency) is only used to buy resources on the decentralised Ethereum network and Ether is convertible to Bitcoin. Nobody views Ether as a rival to Bitcoin.

The debate will continue. A lot of that debate is highly technical and obscure to most people. However at core the issues are economic and driven by developer motivation. The debate will shape the services that consumers and businesses will use years in the future.