It’s 1993 again: (minus the walkman)

The TCP/IP protocol was formalized in 1983 and became the backbone of the internet. During the 1980’s, the applications were limited to simple transfers of information packets across government and educational institutions. Although the technology had promise, widespread adoption remained elusive.

It wasn’t until the invention of the Mosaic browser in 1993 that we started seeing wide adoption of the internet. Mosaic allowed a user friendly way for individuals to interact with the “World Wide Web”.

Mosaic was the critical tipping point that enabled mass scale adoption and use of TCP/IP enabled information transfers. Whether it was news (economist, wired), marketplace (pizza hut in Santa Cruz), information discovery (search engine) the Mosaic interface enabled it.

Similarly with the Bitcoin protocol, the application right now is limited to simple transfers of value i.e. individual X sends individual Y Bitcoin in exchange for a good and/or service.

In 1983, If everyone had believed the only significant use for the internet was to send simple messages across heavily endowed institutions, we’d be living in a very different world and I wouldn’t have had a chance to write this blog post.

The interesting use cases of value transfer which Bitcoin can service include smart contracts, supply chains and even healthcare. This does not include some of the other novel use cases around micro payments and future side chains that enable IoT coordination by allowing machines to write on an always accessible and globally readable database.

So, how do we get there? The true value of the Internet and Bitcoin is driven by powerful network effects, so it’s important to consider the unique growth challenges. Below, I attempt to identify those key factors in hopes of starting a discussion on Bitcoin technology adoption.

VC Funding:

From a funding perspective, total VC funding in Bitcoin related technologies for 2014 was ~$350M. We’re only halfway through 2015 and we have already seen $350M of venture funding pouring into Bitcoin startups. To put that into perspective, IoT saw ~$340M in venture funding in 2014.

Government Regulation:

Given that the primary use case (at least for now) deals with traditional value transfers and the Silk Road debacle is still a relatively recent occurrence, it’s important to consider the regulatory framework of Bitcoin.

We are seeing a wave of acceptance from institutions world wide. There are numerous examples I could mention, that could warrant an entire new blog post, but I’ll limit to a few key ones. The Chancellor of the Exchequer of the UK has indicated the country’s desire to become a hub for Bitcoin. NYFDC just released a framework for the regulation for Bitcoin. In one of the most implicit validations of Bitcoin, the US Government will be auctioning off ~$18M worth of Bitcoins that were seized from Silk Road. The US Government would never have sold $18M worth of cocaine that resulted from a criminal investigation.

Developer Adoption:

Needless to say, without builders building things nothing will materialize. There is a lot of significant interest in the developer community:

1-t9moBxhOMHudeRkwLPzeTgSource: https://medium.com/@kpcb_edge/our-focus-areas-block-chain-technology-f4681d843e9c

Despite the drops in the price of Bitcoin, the number of Bitcoin GitHub repositories continues to grow indicating significant interest in the developer community.

For the TCP/IP protocol, it was the release of the “HTML” language that allowed developers to create websites on a large scale. Bitcoin is already written in languages which developers are familiar with, but will new languages/frameworks emerge that will allow for more efficient development of software for applications that use decentralized value transfers? The HTML of Bitcoin?

User Adoption:

At the moment it seems like it’s only dramatic events that brings Bitcoin into the main stream. Whether it’s the Silk Road debacle or the recent Greek crisis, financial crisis seem to give Bitcoin good publicity.

As more applications are built on the Bitcoin and the narrative focuses on the story rather than the technology itself we could see Bitcoin entering daily lives of individuals.

For the internet, the story wasn’t “the TCP/IP protocol allows information to be accessed within seconds of delivery”, but rather “You can now access your daily news instantly”, that showed the true power of the internet.

As smart entrepreneurs figure out applications for Bitcoin and block chain related technologies the amount of users buying into the technology will scale. The number of internet users didn’t scale to 2.94 billion over night. It was years of infrastructure development and emergence of applications that slowly got almost half of the world’s population online.

There are a lot of positive head winds for Bitcoin and block chain related technologies. The sector is still relevantly young, is achieving widespread institutional acceptance and is filled with entrepreneurs building amazing products that could change our lives in ways we can’t even imagine yet.

So It almost does feel like it’s 1993 again, when all the infrastructure and regulatory environment was in place for the internet to thrive. Perhaps no one technology could ever have an impact on the scale of the Internet, but if there is one, Bitcoin could be a good contender.

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Is my money safe: There’s a FDIC for that.

One of the interesting discussions I’ve had regarding one of my early blog posts has been around bitcoin lending.

The invention of credit has had great implications for economic prosperity and progress. Arguably, the discovery of gold and similar minerals can be credited to have unleashed significant economic progress. It isn’t the intrinsic value of gold that created this value, but rather gold allowed a mechanism to measure credit.

The benefits of credit are widely apparent. A trader on the Silk Road could take a loan from a wealthy individual and use that to buy goods that he would later sell at a profit in a different country, paying back the creditor on his return.

Bitcoin, by design, is a deflationary currency i.e. it’s value increases by time since the amount of Bitcoin released into the network decreases by time and only 21 million bitcoins will be released.

This is in stark contrast to the money supplies issued by governments. There is no upper limit to the amount of dollars the US Fed can print. There used to be a time when all currency issued had to be backed by a certain amount of gold which did impose an upper limit. The gold system was discontinued to allow for expansion of credit to finance World War 2.

So the key question remains: Does Bitcoin lending occur, and if it does, what is the incentive to lend Bitcoin?

The main argument against the extension of credit via Bitcoin is that, by definition, the motive to lend money is to make a return (through interest). However, in the case of Bitcoin, you make a return by simply holding on to it (value increases steadily due to a deflationary network).

The counter argument becomes pretty simple. At the end of the day, if the return you realize through lending is greater than the return you realize through saving, as a rational investor, you would be inclined to lend Bitcoins. However, the ability to gauge the return you would get simply by holding the asset is wherein lies Bitcoin’s weakness.

The high volatility of Bitcoin makes it especially difficult for an investor to reliably “predict” the return they could expect by holding on to the asset.

Additionally, if you were to setup a Bitcoin lending network like a traditional bank, at any point in time you would have lent more Bitcoin then you have collected from depositors. This is the basic economics of how banks work. For each dollar that some one deposits at the bank, you lend out a multiple of that.

The reason that works is at any point in time, only a small percentage of depositors will ask to withdraw their money.

However, there is risk to that. If the amount of depositors looking to liquidate their assets does exceed the current assets the bank does own, the bank will be unable to fulfill its obligations and will “go under”. A typical “run on the bank”, and the reason why most banks fail.

This is a very important to issue to consider, and brings me to the original title of the post. The US Government ensures every bank deposit in the United States up to $250,000. That is to say, if you had deposits in a bank that went under, the US Government will reimburse you up to $250,000.

The US Dollar, backed by the full faith and credit of the United States Government has a clear advantage when it comes to extending credit.

So does Bitcoin lending occur? Yes – a lot of Bitcoin lending appears to be emanating from peer to peer lending networks where an investor could lend Bitcoin to individuals in economies where interest rates are exorbitantly high due to certain economic and political factors, but it remains to be seen whether it turns out to be a significant source of credit.

Below is an assurance from the US Government at my local Wells Fargo, assuring me my money is safe :).

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Do you even Data, bro

After thinking about it for a while now, I’ve finally decided to start a blog. I’ll post my thesis on marketplaces, hypotheses on human behavior and general thoughts on the future.

In an era of “Data Science”, it’s easy to lose sight of simple answers to powerful questions.

To start, let’s look at a simple chart from Google’s Ngram viewer. The below chart shows the percentage occurrence of the word data in Google’s corpus of books since 1800 with a smoothing of 3 years. Trends are more apparent if you deploy a moving average – this allows to “smooth” anomalies such as seasonal variations. So in this case each data point is actually an average of the last three years.

The Y-axis shows of all the unigrams in Google Books sample, the unigram (data in this case) was used Y % of the time.

Now, why is this chart important? The use of data in the common lexicon skyrocketed in the 1900s. We also started seeing unprecedented productivity gains starting in the 1900s. The use of data allows us to make intelligent calculated decisions to set us up for success.

Of course, we must not forget : correlation doesn’t imply causation.

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