The Truth about Bitcoins and the Blockchain — Part 3

Reality vs Hype in Two Foundational New Technologies

Part 1 — Bitcoins, A Real Future
Part 2 —
Blockchain Hype, Mania and Scams
Part 3 — Regulatory Needs, and Promising Startups (this page)

We Need Better Regulation of Bitcoins and Blockchain ICOs

While most bitcoins are majority crowd-owned, there seems to be a continuum of governance models, far too little transparency, and as of yet no easy-to-understand Federal disclosure requirements. Those who launch them tend to reserve large blocks to enrich themselves, making the coin founders the owners of both a currency and a kind of automated venture capital fund (indeed some, like Ripple, have been launched by smart VCs) and that is their basic business model.

Given how they work, I’d love to see the state tax require full transparency and good metrics allowing us to judge how democratic their value creation schemes are, so we know which ones to invest in, and higher tax rates on the profits to the founders behind the less crowd-owned versions of these coins. Ideally, we’d also see not only a bunch of user protections, but also a state application for new coin launch, like a nonprofit or social benefit corporation application.

Like a bank, all DDCs should have some kind of deposit minimums to launch them (which could be crowdfunded), both deposit and liability insurance (after all, we require the government to offer this to banks via the FDIC), and various other user protections. Perhaps they should also have small annual licence fees, and demonstrate a certain threshold of use every few years in order for their licences to be renewed. Such measures would slow the bubble’s development and limit its damage, as most of these coins inevitably fail on the way to consolidation.

New York State Dept of Financial Services regulator Benjamin Lawsky launched the first BitLicence, in 2015. That new requirement drove a large number of startup bitcoin companies out of the state. So far, just three companies (Circle, Ripple, and Coinbase) have received licences to operate in New York State. I hope we see more licenses granted soon, and more states issuing such licenses.

One of the most important things licenses can do is enable more financial transaction transparency, maintaining client privacy but removing anonymity, so these new economic technologies cannot be used for illicit purposes, as they presently are on the dark (cryptographically anonymous) web. In the great new Netflix documentary, Banking on Bitcoin, 2017, which I recommend, regulator Lawsky cited the huge problem of preventing money laundering in our current financial systems to reduce domestic and transnational crime and terrorism, and he noted that untraceable money movements played a central role in the 9/11 attacks. Poor money traceability is a major unsolved problem for society.

The dark web got a big boost when Tor, an anonymous browser that encrypts IP addresses, first created by the US Naval Research Lab to protect online intelligence communication, was coopted by cypherpunk activists in the 2000’s for private use. As Tor supporters like the Electronic Frontier Foundation say, there is a case that anonymizers like Tor offer societal benefits — but also increased personal risk — in repressive countries at present. But they have no place in democratic nations, in my view, and these tools are most commonly used for crime and illicit activity in America today.

In 2011, an entrepreneur with a poor moral compass, Ross Ulbright, paired Tor with bitcoin to launch the first bitcoins-funded black market, Silk Road, to sell a wide variety of illegal drugs, guns, and other things. He was arrested two years later, and his site shut down, and he’s now serving life (read: 20 years) in prison. Fortunately, law enforcement and intelligence agencies are both getting increasingly effective at de-anonymizing and tracking both Tor and encrypted bitcoin transactions, using a growing variety of methods. Because physical world transparency is always growing as the digital world accelerates, we’ll eventually we’ll weed out this all this anonymity.

As David Brin argues well in his masterpiece, The Transparent Society, 1998, democratic societies can best ensure that the nonanonymous world we are creating remains accountable to us by having a lot more sousveillance (bottom-up, or peer-to-peer transparency, initiated by us) than we have surveillance (top-down transparency, initiated by powerful actors). The mass use of things like social networks, of whistleblowing and activist sites, and of our own recording and computing devices, most importantly (in my view) personal sims, will allow us all to better protect privacy (national security, trade secrets, our health and financial records, our email, our inner lives, what we say in our homes, what we store in our sims) while we also eliminate anonymity. Whenever future bad actors do things that society doesn’t like — both major and minor transgressions — they won’t be able to escape. We’ll serve digital subpoenas on the relevant transaction histories, trace the breadcrumbs, and hold folks increasingly accountable to their actions. Some may not like this future, but it is being built at an ever accelerating pace whether we like it or not. I am convinced that with broad citizen participation and feedback, we can make our nonanonymous future much safer and fairer than the world we’re in today.

World Economic Forum on Bitcoins and the Blockchain

The WEF’s Sept 2015 study, Deep Shift: Technology Tipping Points and Societal Impact, (44pp. PDF) by their Council on the Future of Software & Society, is an insightful read. The study discusses 21 “Tipping Points” for the near-term (ten year) future due to software advances. Bitcoin and the Blockchain was listed as #16. I think that’s lower than it should be in general importance to society. I’d rank this topic in the top ten, because of the near-term promise of bitcoins, not blockchain. But it wouldn’t be in the top three. There are arguably several more important software topics, including better and cheaper wireless, fiber, cloud storage, smartphones, IoT, and the myriad fruits of better AI, including self driving vehicles, edtech, and personalized software agents, or personal sims.

They surveyed 816 execs and experts, and for blockchain tech, they defined the “tipping point” where blockchain tech impacts mainstream society, as “10% of global GDP is stored on the blockchain.” It isn’t at all clear how that would be measured. Is this a question about bitcoins market cap? Blockchain use in supply chains? It’s a lame question, like so many survey questions. Crowd predicting the future is challenging enough as it is. WEF hobble themselves at the start when they do it with poor survey questions.

Let’s assume they’re talking about bitcoin market cap. 58% of survey respondents expected this tipping point by 2025. That’s a big prediction, as in 2015, the total worth of bitcoin (BTC) alone was $20B, or 0.025% of global GWP of $80 trillion. For this to happen, the market cap of all bitcoins would have to roughly double every year, 2016: $40B, 2017: $80B, 2018: $160B, 2019: $320B, 2020: $680B, 2021: $1.36T, 2022: $2.7T, 2023: $5.4T, 2024: $10.8T. That could happen, if financial industry- and a few government-backed coins emerge. If it did, it would be a big economic change that would facilitate many more microtransaction-driven crowd-benefiting business models. This seems a reasonable prediction, and I’d bet the bitcoins market cap is at least a trillion by 2025, as we see-saw our way to global adoption.

Unfortunately, several of the other predictions by the WEF experts were quite silly. 84% of survey respondents imagined “The first 3D-printed car in production” by 2025. 64% expected “The first city with more than 50,000 inhabitants and no traffic lights” by 2025, and 45% expected “The first AI machine on a corporate board of directors” by 2025. These responses tell me that most of these folks don’t understand the uses of 3D-printing tech (as just one specialized aspect of manufacturing), that legacy logistics systems like manual driving and streetlights won’t disappear until people do, and that nearly half of their experts have silly expectations of near-term AI.

If those predictions had been done on an open crowd prediction platform like Metaculus, rather than anonymously, the predictors reputations would have been on the line, and I bet most of them would have had the good sense not to predict at all, on topics they don’t think they really understand, rather than be so naively overoptimistic about the near-term future of software.

Some Promising Blockchain Apps and Startups, For the Longer Term

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Sia’s Homepage

There are plenty of good ideas in the blockchain startup space, once we adjust our expectations to include a good deal more risk, and a lot longer development timeframes, than we typically hear from their CEOs.

For just one example, I like Sia, which is trying to unlock value in the 95% of unused hard drive space on all our drives (personal and business) by creating a low-cost distributed storage system, and a digital currency to reward and spread its use. Just like Uber and Lyft unlocked value in the 95% of time our cars sit idle at home, Sia might do the same with those underused hard drives. Another blockchain startup, StorJ, is hoping to do the same.

Both these companies are writing the distributed (peer-to-peer) storage software now, and using the blockchain to add new layers of trust and transparency than in previous distributed software efforts, but we still have no idea yet if it will scale. They are each worthy creative bets, if you like their teams, strategies, and markets, but only that. So set your expectations realistically if you decide to back either of them.

I am hopeful that blockchain will get used more in online voting, but it’s important for startups and investors to realize what they are up against in that application. Governments and the rich have all kinds of incentives to prevent direct digital democracy from emerging anytime soon. Those who think an algorithm will change all that are deluding themselves.

Listen to Andrew Weinreich’s great podcast series, Episodes 7–9 of Predicting Our Future, 2017, on the challenges of getting governments to try online voting. Almost all the politicians are predictably against it, as it takes away their power. Even many academics, maddeningly, are against it, citing plenty of mostly status quo-serving and bogus reasons in the episodes above. The best online voting solutions that Weinreich discusses involve digital auditing, both at the point-of-vote and the point-of-aggregation, with revotes if there is any irregularity. Blockchain is a nice addition, but it needs to be combined with lots of other auditing and technology solutions, and get lots of buy in, if you expect political application.

The British company Smartmatic is the current leader in online voting. They get most of their contracts outside the US, as you might expect. Fortunately, they did get a contract with the Utah Republican primary for the 2016 election, using a private blockchain. But given the systemic incentives against giving us this kind of power, I would predict the best they’ll get in the US is a handful of cities and counties over the next ten years. I wish that weren’t true, but we need to be realistic in our forecasts.

Blockchain-first startups like Democracy Earth and Follow My Vote are hoping to get governments to change the way they vote as well, but their ideological blockchain-centric rhetoric has a naively uptopian ring to it, and that and their B2C business model (as I understand it) makes me bet that they’ll get a lot less farther along in political voting than Smartmatic will, with its B2B approach, over the next decade. They should switch up their strategies, and get more practical in their language.

Unfortunately, in the political reality of early 21st century America, the rich and their captured politicians, as well as our honorably self-reliant culture, and our instinctual distrust of social welfare schemes (which is actually a great instinct, until our education systems are fixed to make Americans more self-reliant and continual learners) will work together to keep us from getting both digital democracy and basic income until we get both lobby sims and education sims, in my book. The lobby sim future, where we have personal AIs advising us how to vote and craft legislation to protect our interests, is at least ten to twenty years out. Likewise the education sim future, where we get more useful job skills and self-improvement from daily interaction with our personal education sim than we do from our conservative, committee-driven educational systems. So we need to get busy creating personal sims. Blockchain itself will not get us out of our antidemocratic plight. It’s nowhere near powerful enough to do what the idealists hope.

Where I can imagine blockchain for voting making real headway over the next five years will be in adding better voting and conflict management systems to B2B and B2C platforms, so-called distributed consensus. That application doesn’t require the consent of powerful actors to emerge. Hopefully something great will happen in this space, but I expect it will be an evolutionary, not revolutionary, series of new platforms, and I haven’t seen a clear sign of them yet. Please let me know if you do!

I am also hopeful that we’ll some incrementally better prediction market platforms that use distributed ledgers. But will take years, lots of dedicated users, smart design and testing, and a hell of a lot more than the blockchain to make something like a prediction engine, the basis of the Gnosis ICO, actually work well. It will take decades, and a lot more AI intelligence, to substantially de-friction the legal system.

There are many interesting blockchain companies working on ways to use distributed ledgers to improve governance, dispute resolution, and “meta-consensus capabilities.” The biggest ICO so far this year has been Tezos, ($208M raised), a team working to develop crowdfounding/ crowdproduction platforms where people are rewarded (using Tezos coins, of course) for their ongoing work on a project, like user-generated content, or for their work in an organization, like a startup, based on the extent to which their contributions are recognized by the community.

Those are noble and worthy ideas, and I can imagine user-loyal startup and content production platforms emerging using this technology, especially for geek-centric platforms like Reddit. It’s much harder for me to imagine this working today with startups. Prior attempts have been made to create something like this for startups, like Assembly (now shut down), and it is much harder than idealists think. Even for content production and management, the companies using blockchain-based platforms will have compete against established players and startups that use easier-to-manage centralized software solutions, companies that can still use the blockchain to pay folks with their own digital currencies, but don’t try to push it into spaces where it is an untested experiment and likely to fail.

Any content generation company (big or small) that pledged to give back a significant percentage (say, 30 or 40%) of their ad revenues or pretax profits directly to their community, and paid users to read and rate that content, would gain huge loyalty today, without any use of blockchain tech beyond using a digital currency for these microtransactions. So we must realize that this kind of centralized response is a real future competitor to blockchain experiments like Steemit, which I really like and want to see succeed.

Here’s a bit of advice for technolibertarian developers: Customers don’t really care how transparent your processes are, especially if that transparency comes at a performance or upgradability cost. What they really care about is whether what comes next is more convenient, and capable, and seems fairer than what is presently in place.

The InsurTech renters and home insurance startup Lemonade, for example, effectively appeals to millennials in a number of ways, including a pledge to give back all but 20% of their pretax profits to their customers. Human and digital auditing can get people to trust that promise. Whether Lemonade survives or not won’t depend on whether they use trendy and still-untested tech like the blockchain (they don’t), but whether or not their promise of a faster and fairer service (business process and legal contract) can be supported by their web-based models and algorithms for calculating risk.

I Share The New Economy Vision, But Not the Strategy

I understand the desire to create a new online economy, one less susceptible to the corruption and politics of the world we live in today. It is an alluring vision, especially to a millennial technologist, sick of our seventy year slide into plutocracy, and looking for a way to reset the system. But people will never be smart enough to create such an economy from technology and freedom alone. We need smart regulations and smarter machines. We’re all born with ineradicable evolutionary biases, and besides our noble virtues, too many of us have a willingness to cheat, and deep desires for wealth, power and pack dominance. We’re stuck with ourselves.

In my view, the most powerful way out of the present economy is not distributed ledgers, which are just one small part of what’s coming, but rather to create far-faster-improving learning machines than human brains, and to make them personalized extensions of us, via tools like deep learning, smart agents and personal sims.

As tomorrow’s sims learn our personal preferences and values, they’ll increasingly protect us from the manipulation and coercion of the outside world, just like your spam, virus, and malware filters protect you from all manner of nasty stuff today. They’ll help us act smartly, occasionally in mass actions (crowd activism), locally, nationally, and even globally, to ensure that powerful actors (states, corporations, institutions, plutocrats) prioritize protecting our values. And they’ll be the fastest learning parts of ourselves, from when we first use them all the way to the tech singularity.

Big companies will surely offer us the most popular and pretty personal sims, but some will also be built open source, in communities like Github. We’ll flock into such solutions whenever we feel the proprietary ones are getting too expensive or manipulative. A Sim-Based Economy will one day emerge, one surely powerful enough to swing us back to a more democratic (lower case “d”) society. That’s how we’ll get to better world. And that is a twenty to thirty year vision, not a five year one. There are no shortcuts.

John Smart is CEO of Foresight University and author of The Foresight Guide. You can find him on Twitter, LinkedIn, or YouTube.

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CEO, Foresight University. Author, The Foresight Guide.

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