This is Part 1/Chapter 1 in The Blockchain Economy book. This serialised book is a practical guidebook for investors, entrepreneurs and employees who want to learn how to prosper during the transition to an economy where value exchange is permissionless and disintermediated. For the index please go here.
The transition from exchanging content online to exchanging value online changes everything. Read this book to learn how to prosper in this new economy.
I do not intend to contribute to the hype that words like new economy imply. My objective with this book is exactly the opposite. I want this to be a practical guide for investors, entrepreneurs and employees.
My aim in this chapter is to introduce the hard and unglamorous infrastructure work of building the Blockchain Economy, the equivalent of sewers, roads and trains in the industrial revolution,
The aim of this book is to to provide actionable context for anybody who needs to figure out the impact of this seismic shift on their work, whether you are an entrepreneur or a senior executive or a student entering the workforce or somebody reentering the workforce after a lengthy absence.
Any asset can be bought and sold using Blockchain. These assets can include traditional financial assets – currencies, commodities, bonds, equities, derivatives – as well as new cryptocurrencies and non-traditional assets such as Invoices (Receivable or Payable), precious metals,diamonds, art/antiques, real estate, livestock, food, wine,music rights, other IP rights. You name it, you will be able to trade it. Every single one of those assets has an ecosystem today that needs to adapt fast or be disrupted.
All of this can be done without permission from legacy financial institutions. The Web enabled us to exchange content online. Blockchain enables us to exchange value online.
This will be a transfer of wealth/power bigger even than what happened with the Web and Social Media waves. So you can expect a lot of well articulated articles/videos explaining why this change will never happen and why the status quo incumbency will continue to rule. Those articles will gain a lot of credibility from the failures of many new Blockchain ventures and periodic cryptocurrency bear markets, both of which will lead to cries of “see, I told you this was all rubbish”.
Yes, the New Economy really was a New Economy
During the Dot Com era, “”New Economy” was the phrase used to unlock capital. So the phrase became regarded as hype after the bubble burst, but there really was a New Economy. This is obvious from even a a cursory glance at FANG stocks Facebook Amazon Netflix Google) and all the old economy companies that became roadkill in front of their digital truck.
The Blockchain Economy will go through the same boom, bust, build cycle.
During the build phase, it won’t look anything like what we have today because Bits Don’t Stop at Historical Category Boundaries.
The infrastructure for the Blockchain Economy is being built in 3 layers
The 3 layers, seen from top to bottom:
Layer 3: Blockchain Market Infrastructure. See Next Chapter 2.
Layer 2: Middle Layer Services. See Chapter 3.
Layer 1: Consensus Protocol Governance Platforms. See Chapter 4.
Blockchain Finance Market Infrastructure
The Legacy Market Infrastructure has been built over centuries. The Blockchain Market Infrastructure is being built at light-speed. If will take many years and there will be some stumbles . At each stumble, those invested in the Legacy Finance Infrastructure will publicly trash-talk Blockchain while investing quietly to be a player in Blockchain Finance. That is straight from the corporate playbook for dealing with big bang disruption (described here) with 4 steps
- A. See it coming.The disruption threat has been obvious for years.
- B. Slow the disruptive innovation long enough to better it. This is when the trash talking is loudest.
- C. Get closer to the exits, and be ready for a fast escape. This is when big institutions slim down and do mass layoffs. Don’t do this until D is ready as C will publicly send a signal about weakness.
- D. Try a new kind of diversification. This is when investments made earlier (at the same time that the trash talking is loudest) start to reach big enough scale and Legacy Finance attempts a make-over to become Crypto Finance
Legacy Finance is actively investing in Blockchain Finance. We are now mostly at Step 2 (invest quietly, trash talk loudly).
Legacy Finance has failed in many areas:
- Early stage capital raising.
- Financial inclusion for billions in emerging markets.
- Financial inclusion in the West (serving those left behind by globalisation).
- SME Finance.
These become the market spaces where Blockchain Finance can win
Blockchain Market Infrastructure is being built in two phases, as is the norm in disruptive waves of innovation.
- Phase 1: the talking heads phase. The term comes from when the early days of TV initially simply imitated Radio. Today it is common to take a category from Legacy Finance, with all its associated business models and attach the name Blockchain in front (such as Blockchain Hedge Fund or a Blockchain Exchange or a Blockchain VC Fund.
- Phase 2: a crypto native infrastructure emerges. This is when boundaries established during the Legacy Finance era.become blurred. For example, in Legacy Finance, Trading and Settlement were different categories with different companies. In Blockchain Finance, when we move closer to Real Time Settlement, Trading and Settlement become one category/company. Or consider wallets and exchanges, which are different categories with different companies in Legacy Finance but increasingly one category/company in Blockchain Finance; for example, look at what Coinbase is doing.
For more, please go to Part 1/Chapter 2, Blockchain Market Infrastructure.
Blockchain Middle Layer Services
These services include:
- Identity (including Privacy, KYC and Security).
- Data “oracles”.
The services are totally critical but it is hard to charge a lot of money for them. They are mostly like air – the most critical resource but totally free. Therefore while Middleware not a sexy area for investors, many great developers are drawn to the challenge.
For more, please go to Part 1/Chapter 3.
Consensus Protocol Governance Platforms
The two biggest platforms by almost any measure are Bitcoin and Ethereum. Then there are all the challengers
- Bitcoin challengers offering better faster cheaper payments.
- Ethereum challengers offering a better faster cheaper development environment.
- Non-Blockchain Consensus Platforms
All of these platforms have a consensus protocol to allow value to be exchanged through permissionless networks. The reason I call these Consensus Protocol Governance Platforms is that creating a consensus protocol is the easy part. What is hard is working through issues when something goes wrong (and one thing that does NOT change in the Blockchain Economy is Murphy’s Law). That is why we dedicate Part 1/Chapter 12 to Why Non State Governance For Bitcoin Ethereum And Other Cryptocurrencies Is So Hard.
For more, please go to Part 1/Chapter 4.
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).