Blockchain, Digital Governance, Tech and Business

Exponential Technology Revolution #4 – Digital Governance realities

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(En Español aquí)

The best way to illustrate the power of Exponential Technology Revolution #4 – Digital Governance is to look at its real-world effects.

We will start with the examples that are already real and “in the wild”, covering 4 areas: private cryptocurrencies, ICOs, digital registries and marketplaces, and smart contracts, autonomous organizations and forks, The sheer volume of examples makes this post quite long, even if it only skims the surface. We will leave speculations such as public cryptocurrencies and crypto-laws for a later post.

Private cryptocurrencies. Offer a decentralized and pre-determined store of value and interchange mechanism.

Trustleness with Digital Governance has allowed a real explosion of cryptocurrencies. Going from nothing to a market cap of over 150 billion dollars (October 2017) in less than a decade. Cryptocurrencies use blockchain technology and cryptography to create totally decentralized money that people trade on exchanges. Cryptocurrencies are the first privately created currencies to achieve massive adoption and could change drastically how money works.

It is important to understand that, for the most part, cryptocurrencies are totally dependent for their valuation on what people are willing to pay for them. They are only based on the shared fiction of their use as a store of value. If this shared fiction evaporates they would go to zero immediately as they have no alternate source of value. Gold can be used for jewelry and industrials processes. Even virtual gaming currencies such as World of Warcraft gold can be used for entertainment. Cryptocurrencies are mostly annotations on a database with no value beyond what we are willing to pay for them.

We will illustrate cryptocurrencies through several stories. First, through Bitcoin, the philosopher’s stone that unlocked the blockchain world. Second, Ethereum, which expanded the concept of Bitcoin to smart contracts and computing, and might have value beyond a pure store of value. Third, we will explore the five largest Bitcoin look-alikes that focus on the “currency” function. Finally, we will quickly cover several true tokens that go beyond a pure store of value.


Bitcoin (#1 ranking according to – 75 billion euro market cap 15/10/2017) is a modern fairytale story. We have a mysterious wizard figure, that creates fabulous wealth as if by magic and then disappears and is never seen again. The genesis of Blockchain technology and Bitcoin came in November 2008 when the Bitcoin whitepaper was published by Satoshi Nakamoto. No one knows if Satoshi is a person, a group of persons and what is the real name or nationality. Based on the whitepaper the first bitcoin server node was created in January 2009, at the beginning it was mostly Satoshi mining, with more than one million bitcoins mined in the first months by Satoshi himself. Satoshi then disappeared the last email in April 2011, passing down the reins to Gavin Andresen at the Bitcoin Foundation.

In the early days, Bitcoin was considered a medium of exchange and one of the most famous Bitcoin transactions was two pizzas for 10.000 bitcoins in 2010. At October 2017 prices that would be 25 million euro per pizza. In those days Bitcoin prices were in cents, bitcoin parity with the dollar made the news, and mining could be done with home computers. That was the early wild days of Bitcoin. Those were also the days in which the only security flaw in Bitcoin was exposed and promptly corrected in August 2010.

The first Bitcoin gold rush can be dated from the 2 USD price low point in Dec 2011 after the first “Bitcoin crash” to the collapse of Mt.Gox in February 2014. Here Bitcoin started to make the news with a CNBC piece and a media apparition in the Good Wife series. However, it was still pretty much unknown. The first real media attention came through its use in the Silk Road, the darknet illegal market for drugs and other items, and the publicized trial of Ross Ulrich or Dread Pirate Roberts, the alleged kingpin of the site. The life of the Silk Road from 2011 to October 2013 coincided almost exactly with the first Bitcoin gold rush, confirming that the first killer use cases of many technologies is borderline legal. This era also led to industrial mining, with the first dedicated ASICs appearing in 2013 after a brief use of GPUs.

The rest of 2014, 2015 and 2016 was apparently a lost epoch for bitcoin, with the price moving sideways and even collapsing temporarily to the low hundreds. However, it was undoubtedly an era of infrastructure and usage build up. Blockchain technology started to become popular beyond hacker circles, with banks especially starting to explore it. Ethereum and other cryptocurrencies appeared. Mining got really industrial. The community thrashed out how to increase transaction volumes through SegWit and larger blocks. Strong infrastructure services like Coinbase or Kraken helped popularize bitcoin in particular and cryptocurrencies in general.

This lead to 2017 which up to now has been a year of price explosion and Bitcoin domination. Bitcoin has climbed to the several thousands of dollars with pundits predicting even more lofty peaks. Bitcoin has become firmly entrenched as a reliable store of value in a world of increasing risks around fiat currencies (Euro-weakness, Trump tax cuts, etc…). Bitcoin has also managed to survive some pretty major events: a hard fork that created Bitcoin Cash or the banning of cryptocurrency exchanges in China in September. It is facing its biggest technical challenge with the implementation of Segwit 2x in November. Each challenge has made it stronger, as Bitcoin adepts have seen that Bitcoin is resilient and secure, at least until now.

Bitcoin has some severe limitations preventing it from exploiting the full power of blockchain technology and the Digital Governance of money and property. These limitations have created the rest of the cryptocurrency innovation we will see. First, is its very limited flexibility. This has lead to Ethereum and the rest of the ICO Cambrian explosion. Second, its limitations as a medium of payment (speed, blocksize, mining footprint) have led to the other improved stores of value. These alternatives to Bitcoin seem to have strengthened it rather than substituted it.


My first exposure to Ethereum (#2 – 25 billion) was in late 2015. I was still struggling to understand what the Blockchain meant and if Bitcoin was useful beyond purchasing heroin from Afghans in the Silk Road. I was introduced to this concept created by a wiry Russian whizkid that had just started operating earlier that year. It claimed to expand the potential of the blockchain much beyond what Bitcoin could do. If Bitcoin was just a store of value, Ethereum was a computer that was Turing complete, that is to say fully programmable.

I started digging deeper and trying to read and understand more about it. Those were the days of “it is not about Bitcoin, it is about the Blockchain”, so I tried to understand what was behind the technology. Being an engineer I was surprised that the basic technology was not very complicated to understand. Ethereum however, took it to a whole new level. From a database to an operating system and a programming language.

During 2016 we started to see the first inklings of the potential of smart contracts. The DAO (Digital Autonomous Organization), the first organization with no people in it, just a smart contract, was created in May 2016, raising more than $150 million dollars. This represented a number of firsts which we will cover later.

From there Ethereum continued to evolve, creating the ICO Cambrian explosion that we will discuss later. ICOs have been the third blockchain killer application after buying drugs and storing value.With this killer application, Ethereum became the infrastructure for most cryptocurrencies cementing a place in the ecosystem second only to Bitcoin.

For me, Ethereum also has a very personal meaning. Ethereum is the first cryptocurrency that I bought. It was still in the 10-20€ range when I started and I lived through the ups and downs to the 200-300€ range it is now usually in. I am still banging my head against the wall for not moving quicker!

Ethereum is still evolving quickly, with a new major update requiring a fork being deployed as I write this words (less than 2.000 blocks for Byzantium). Whether Ethereum will become the blockchain distributed computer of choice like Bitcoin has achieved with the store of value function is still to be seen. Functionality will be much more important, and other alternatives are trying to quickly outmaneuver it. However, whatever happens, Vitalik’s brainchild has undoubtedly taken Blockchain and Digital Governance to the next level and deserves a page in its history.

Improved stores of value: Litecoin, Ripple, Bitcoin cash, Dash, Monero

The success of Bitcoin and its limitations in terms of transaction speed and cost have led to the creation of a host of other cryptocurrencies that are focused on being an equivalent to Bitcoin that is efficient in transactions. Many people call these the silvers compared to Bitcoin’s gold, but its creators are convinced that a lot of value can be created through silver.

The five main alternatives, which are all in the top 10 market cap as of October 2017, market themselves as Bitcoin+, each with a particular focus:

Litecoin (#5 – 3 billion) is the most straightforward. It is just Bitcoin faster block time and a memory-hard vs. computation-hard mining algorithm (leading to more distributed mining). It also moves faster with improvements and it tends to be the trial ground for the Bitcoin improvements such as SegWit

Ripple (#3 – 8 billion although disputed as the float is relatively small) is totally different but positions itself as a medium of exchange. Ripple aims to take over international transfers and has several banks working with it to do so.

Bitcoin cash (#4 – 4 billion ) is the result of the August fork of bitcoin. Allowing for a bigger blocksize (8MB vs. 1MB) and faster difficulty adjustment.

Dash (#6 – 2 billion ) is also faster than Bitcoin (2,5-minute vs. 10-minute block time) and is focused on being more user-friendly (human-readable addresses, anonymity, instasend). It also has a formal governance process that should allow it to decide and fund its evolution much faster than Bitcoin.

Monero (#8 – 1 billion) focuses mainly on greater privacy for users, allowing them to keep hidden their account balances. It also has improvements similar to the other stores of value we have seen: a better mining algorithm, larger and adaptative block sizes, faster transactions.

These five are just the largest of the store of value alternatives, but there are many more like zcash, focused on anonymity, and surely many more will come. Whether one will be able to substitute bitcoin or significantly erode its position only time can tell.

The token Cambrian explosion

Ethereum and the ERC20 token standard, which we will review later, created an easy way to create a cryptocurrency for anything. The abundant money in the cryptocurrency space created by the 2017 price multiplication of Bitcoin and Ethereum was available to fund it. So crypto-enthusiasts launched themselves in a veritable Cambrian explosion of tokens (a token is generally used to describe a cryptocurrency that has a function beyond the pure store of value).

We will most probably end 2017 with more than 1000 cryptocurrencies. Among them we have much variety. There are the stores of value (Bitcoins+), attempts to create better Ethereums (e.g. Cosmos, Neo – #9 – 1 billion), there are even what could well be real Ponzi schemes (e.g. Bitconnect – #10 – 1 billion but only tradeable on their propietary exchange) but for the most part, we have tokens that attempt to solve some different decentralization challenges.

These tokens span the ridiculous and the most probably fraudulent, but for the most part, they are honest attempts to solve real-world problems. We will quickly cover 5 examples taken from the most valuable and the most interesting:

IOTA (#11 – 1 billion) is one of the most valuable and most interesting, focused on creating an extremely low-cost transaction infrastructure for the Internet of Things, where billions or trillions of devices will interact with low power and extremely low-value interactions that will add up to Integrated Reality.

NEM (#7 – 2 billion) is focused on property and has features such as human-readable namespaces similar to those of the internet and “mosaics” which represent property and can be distributed.

Omisego (#14 – 600 million) attempts to disrupt and substitute financial institutions by creating a token that can be used to decentralize financial transactions.

Storcoin J (not in the top 100) is a very interesting attempt to decentralize storage of information. Creating a token that is traded and at the same time is used as a payment method and reward for long term information storage.

Basic Attention Token (#41 – 100 million) is another fascinating token, in this case by the creator of Mozilla. It attempts to reward content producers when they receive the attention of users. Allowing to go beyond advertising and to a real economy of attention.

There are literally hundreds of tokens, many of them thoughtful attempts to use Digital Governance to transform some of the world’s most intractable problems. If history is any guide this Cambrian explosion will lead to a lot of dead ends, but also to many amazing and world-changing innovations.

Initial Coin Offerings – The magic behind the Cambrian explosion

Late in 2015, only months after its creation, Ethereum incorporated informally the ERC20 standard. A standard for tokens or coins to be created and sold easily on top of the Ethereum blockchain. This unleashed Initial Coin Offerings or ICOs. ICOs have become the killer app for Ethereum and fuelled most of its growth. Surprisingly enough the ERC20 standard wasn’t formally adopted as an Ethereum Improvement Proposal (EIP) until September 2017, and Ether, the Ethereum coin, doesn’t even comply with the ERC20 standard.

An Initial Coin Offering is at its core a very simple concept. An organization creates a supply of a new cryptocurrency based on a given algorithm and sells part of them to the public. It is not selling a stake in the organization, it is rather selling part of the ecosystem. How to do this (e.g. Zug-based foundations) and how to structure the coins themselves (the famous whitepapers) is much more complex.

The ICO boom of 2017 based on ERC20 has been comparable only to the most intense manias of all times, like the Internet Boom or the tulip mania in seventeenth-century Holland. Approximately 200 ICOs raised close to 3 billion dollars up to October 2017, surpassing the amount raised for Blockchain by Venture Capital.

The capital raising has been fuelled by an incredible bull market for Ethereum and Bitcoin that has created many instant millionaires who are happy to reinvest part of their proceeds. This easy money means the investment criteria are quite relaxed when compared to professional investors. A couple of kids with a whitepaper (the equivalent of the Internet Boom powerpoint) have been able to raise tens or even hundreds of millions of dollars with no real product or market traction behind them. Regulation has also fallen far behind ICOs, making them a lot simpler than IPOs and allowing regulatory arbitrage.

We can expect many of the companies that have raised money this way to crash and burn, as they did in the Internet Boom. However, when the chaff is separated from the grain we can expect some of them to be the titans of the blockchain economy, much like Google, Salesforce and Amazon emerged from the ashes of the dotcom bust.

We have also witnessed a completely new way of raising money. An incredible democratization in access and simplification in process. As well as the opportunity to consider a whole new way of integrating customers and ecosystem in the fundraising process. ICOs have come to stay, even though the current laxity will disappear.

I have been involved with several companies considering ICOs, both companies I invest in as well as others I advise. I have been surprised by three main differences compared to the traditional capital raising process:

First, the amount of money available is staggering making it a lot easier to raise more capital quickly. If this continues it will really boost the entrepreneurial ecosystem and pressure VCs significantly, as they are predicated on capital scarcity.

Second, the regulatory and legal uncertainties are still very significant. There is scant precedent and the SEC and other agencies are still only starting to intervene. We are also seeing some jurisdictions, such as Zug in Switzerland, invest heavily to become the “Global Delaware” of ICOs.

Third, ICOs allow a much more nuanced and complex kind of capital raising. Instead of selling the ownership of the company, you are selling tickets to the ecosystem. Depending on how you structure those tickets and the ecosystem you create, you might be able to jumpstart a business model that would be difficult to access from a traditional organization.

Stay tuned to ICOs as they will be part of the future.

Digital registries and markets

I have watched companies and the public sector react to and internalize the Digital Governance revolution over the last three years. It usually starts in disbelief, “Don’t talk to me about this, it is only useful to buy drugs and create Ponzi schemes.” Then you move to “Help us understand it and see if there is something useful”. Finally, you quickly end up in “I need to get into the action, what should I do immediately?”.

I have seen this evolution with large banks, other corporations, and nation states. The main difference has been in the speed of going through them and incorporating into the organization people with real expertise and focus. There are early adopters both in government and enterprise, but even followers are starting to move faster.

Creating institutions or central organizations that leverage Blockchain for some specific thorny trust issues tend to be some of the first use cases that governments and enterprises gravitate to. They solve a pain they have today and that traditional technologies and ways of thinking are not equipped to solve. All over the world, we see four use cases that seem to be incredibly well suited for Digital Governance: Land Registries, KYC Registries, Trade Finance Registries and Stock Exchanges. We will also briefly touch on the cryptocurrency infrastructure which represents a whole new set of institutions that have emerged and are “blockchain-native”.

Land Registries are some of the oldest and most important human institutions. After all, according to Savils, Real Estate represents over 200 Trillion USD in total value and over 60% of mainstream assets. They are also some of the less evolved and more at risk from corruption, as they continue to be similar to their Mesopotamian earliest predecessors. Digital Governance allows evolving Land Registries to a digital, decentralized and trustless model. This threatens the current infrastructure wholesale while promising an incredibly more efficient and reliable fabric for our real estate transactions. There are already pilots in at least Illinois, Costa Rica, Georgia, and Sweden. A good mix of developed and developing markets.

KYC or Know Your Customers registries are an obscure but extremely important piece of the banking and financial global infrastructure. They allow verifying who financial institution customers are to avoid money laundering, tax evasion, and terrorism. Right now each financial company does it independently with great cost and pain for users. The potential to do it jointly with Blockchain technology is very obvious, leading to happier users, governments, and companies. It is being piloted in most countries either by consortia or by governments.

Trade Finance registries would solve one of the central problems of global trade. Currently importing or exporting requires a maze of documentation and verifications in the sender and receiver sides to ensure the goods are really shipped and the accompanying financing is made available at the right time. Both Hong Kong and Singapore are trying to create Trade Finance registries that put them at an advantage as global trade hubs. Other countries are also looking at the problem to capture opportunities.

Stock exchanges are looking how to evolve again. Digital technology has transformed them fully, but with blockchain, they could go even a step further. Instant trustless hyper-efficient settlement seems to be a realistic goal. The exchange that develops and deploys this technology could stand to win a preeminent position in the global stock markets. The Australian Stock Exchange (ASX) is investing heavily in transforming itself, and other large exchanges like Nasdaq want to become the Blockchain guide for the rest of the smaller exchanges.

Cryptocurrency infrastructure has been built up quickly over the last 3-4 years. It has gone quickly from nothing to an infrastructure to support a close to 200 billion market in October 2017. This infrastructure includes exchanges (e.g. Coinbase, Kraken), wallets (e.g. Ledger, Jaxx) and many other value-add providers (e.g. Shapeshift). Not surprisingly many of these firms have used Blockchain extensively for their developments and is a great example of Digital Governance.

Smart contracts, digital corporations and forks

May 2016, that was the moment when the potential of Blockchain really dawned on me. I got to see one of the most amazing epics in which a whole new concept was created, its dangers shown brightly and a new word coined in less than two months.

I had already been looking at Blockchain for some months then, and Ethereum had really started to attract my attention. I suddenly learned about an organization that had managed to raise 150 million USD in Ethereum. That got my attention. I speak often with entrepreneurs and venture capitalists and know how difficult it is to raise money for a company or a fund for a venture capital company. Raising 150 millions in weeks was beyond remarkable.

My second shock was that the company was totally based on Smart Contracts. There were no people within it, it would work exclusively as an automatic organization run by code. Putting 150 million euro in a purely code-run organization seemed like an incredibly important and interesting experiment to me. The experiment was even called the DAO, Digital Autonomous Organization. A beautiful combination of ancient Chinese philosophy with a pure expression of what they were trying to do.

Many of my clients understood Blockchain and its implications through the DAO. You could build something completely trustless and endow it with the code that would run it. It might work or not as a profit-making enterprise, but it aimed for something much more important, it was a demonstration of the power of Ethereum.

Of course, it very quickly provided another incredibly important example: the dangers of programming organizations and bylaws. In Jun 2017, an unknown hacker identified a bug in the organization’s smart contracts that allowed to empty its coffers through a trivial procedure. It was a second-order consequence of some apparently unimportant lines of utility code. The renowned security and programming experts who had reviewed the code had missed it completely, but someone had found it.

As with many of Bitcoin’s stories it seemed out of a fairy tale. Say the magic words and the genie would give you all the gold. It was very real magic that quickly started to empty the DAO’s coffers to the chagrin of its creators. Now a great moment of decision came, you could just accept the flaws in the smart contracts as an unintended “feature” and let the attacker keep the 150 million. Alternatively, you could change Ethereum to prevent it.

Vitalik and some of the other leaders did just that and “forked” the Ethereum blockchain into two alternate realities. Reality A or “Ethereum Classic” (#12 – 1 billion) was a world in which the “feature” was kept and the attacker kept the 150 million. Reality B or “Ethereum” was a world in which the DAO contract was amended as if by magic and the theft never happened. The two paths were open for the Ethereum miners and community to choose. They could decide their own adventure and they did.

Approximately 95% of the community voted for Reality B and supported Vitalik and the rest of the leadership. Now Ethereum is valued between 200-300€ while Ethereum Classic is between 10 and 20€. We can say that reality is ~95% B and 5% A through the fork.

And so the DAO brought us a demonstration of smart contracts, the concept of a fully autonomous organization, an example of the dangers of bugs in smart contracts and the powerful concept of a fork.

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