What Is Going On In Ridesharing?

Strategy is best understood when you take a holistic look at what is going on. It is hard to parse the complete rationale for good strategic moves in isolation. But, take a step back, zoom out and the view becomes a lot clearer. That is definitely the case when weighing moves in ride sharing these days.

News broke this week that Uber is planning on selling its South East Asia unit to rival Grab. This is similar to what they did in China with Didi. So, it seems to make sense.

But, in the spirit of stepping back, let’s take a look at the state of global ridesharing relationships.

Once you look at this, is it any surprise to hear Uber might be partnering with Grab?

Uber, Softbank, Didi, Grab are part of a web of relationships that brings together some of the biggest global ridesharing players. This is particularly important for Grab at a time when its battle with Go-Jek is intensifying in Indonesia – one of the most important South East Asian markets. Go-Jek is armed with a partnership with Waymo (Google’s autonomous car unit) thanks to its latest funding round.

Now, such battles in the ride sharing world are expensive and distracting. Why have Grab fight Uber AND Go-Jek? Especially when it is Softbank’s money at stake?

Didi is the global ride-sharing powerhouse. In an August note on cars titled “From Daimler to Didi,” I’d called out the fact that I was long Didi in the global ride-sharing game.

In the race to dominate ride sharing, Uber raised massive amounts of funding and attempted to obliterate its rivals. Didi, on the other hand, took a different approach. It first merged with its biggest rival in China, then persuaded Uber to get out of the country (in return for a 20% stake) and has since been using its war chest of funds to invest in ride sharing networks in South East Asia (Grab), the Middle East (Careem), Europe and Africa (Taxify). Didi may be creating the ultimate network of ride sharing services.

For the longest time, ride-sharing seemed to be a battle between two opposing styles personified by Travis Kalanick of Uber and Jean Liu of Didi. While Travis focused on a testosterone fueled fight, Jean Liu used her considerable deal making acumen and an almost collaborative approach to competition to sway the pendulum decisively toward Didi.

In the ride-sharing world, 2017 was as much about the self-destruction of Uber as it was abotu the rise of a dominant Didi. A newly added $9.5 Billion Dollar war chest has since been deployed to make acquisitions like 99 Taxis in Latin America, investments in bike-sharing, car-sharing and autonomous cars. Didi – without question, is the world’s foremost ride sharing superpower.

Didi has handled its rise with style and PR smarts. The firm’s PR engine has ensured all attention has been focused on Jean Liu, its popular President. Jean Liu, with her impressive deal making acumen, has also been the anti-Travis figure that ride-sharing and Didi needed. Here’s an example excerpt from a recent piece on Wired that served as both a profile about Didi’s ambitions as well as Jean Liu –

Where Uber and its US peers talk of upending established economic models, she wants Didi to be seen as a calming force. “You talk about why we’re different from Silicon Valley firms, why we don’t just talk about disruption,” she says, suggesting some tech companies are insulated from the real-world risks her drivers and passengers face. “When you order something from an e-commerce company you don’t expect to be killed or robbed, right? In this business, you do.”

“You cannot afford to be disruptive, if you haven’t thought about everything,” Liu says finally, summing up the anti-Uber philosophy that will guide her during the battles ahead. “I think the key is: be humble. And be open minded. And not to think you know everything.”

Very. Smart.

So, what lies ahead in the world of ride-sharing? I suspect the Softbank playbook would look something like –

  • Uber does indeed go ahead with selling its Asia Pacific operations to Grab.
  • Uber also sells its India unit to Ola to focus on North America and Europe.
  • Didi, on the other hand, would have plenty on its plate with China, South America (99 Taxis) and Africa (Careem, Taxify).
  • Over time, we’d see more consolidation with Didi possibly buying Grab and operating à la P&G/Unilever/Volkswagen.

As it stands right now, the main obstacle to the success of this global ridesharing happy family dream is Waymo.

Why Waymo matters – understanding the real battle. To understand why Waymo matters, we must step back further. There are two massive upcoming changes in the world of transportation –

  • Internal combustion engines to electric
  • Human driven to autonomous

While traditional car companies are focused on staying relevant in the era of the electric car, the end-game is likely going to be all about ensuring survival in the age of the autonomous vehicle. Here, it helps to take apart a useful speculative analysis by Ark Invest on the revenue per mile from autonomous cars. They predict the following –

  • 70% of revenue goes to fleet operators (e.g. Avis, taxi companies)
  • 20% of revenue goes to platform providers (e.g. Waymo, Baidu, Tesla, etc.)
  • 5% to hardware manufacturers (e.g. traditional car companies)
  • 5% to lead generators (e.g. Didi, Lyft, Uber, etc.)

However, these are just revenue projections. Traditional car companies and fleet owners stand to simply provide the commoditized hardware. The winner, in terms of profitability, is going to be provider of the software platform. With more autonomous test miles In California in 2017, Waymo is perfectly positioned to be that platform.

But, that’s assuming ride-sharing companies (and traditional car manufacturers) are content being “lead generators.” Everyone will want to move up the food chain.

This is also where ride-sharing companies are uniquely positioned to compete with Waymo/Google. Building the world’s best machine driven platform requires engineering prowess AND vasts amounts of data. Google may boast the engineering prowess but ride sharing companies possess treasure troves of data. While Google will get a taste of some of that via its partnership with Go-Jek and Lyft, it will be be tough to compete with a partnership that shares data across Didi, Careem, Taxify, Grab and Uber.

And that, to me, is the game Softbank is playing to win.

Links for additional reading

  • Uber planning to sell South East Asia unit to Grab – on CNBC
  • Waymo Go-Jek – on Reuters
  • Didi buys 99 – on Bloomberg
  • Didi raised $9.5B in 2017 – on Quartz
  • From Daimler to Didi – on Medium (prior Notes by Ada)
  • Didi’s global ambitions (part Jean Liu profile)- on Wired
  • Autonomous car revenues per mile – on Ark Invest
  • Autonomous miles in California – on The Verge

Who sends you email?

My Gmail account gets two kinds of emails – emails from brands and cold emails from people I don’t know.

This wasn’t the case when I first set up my Gmail account 12 years ago. A key part of the value proposition back then was to hear from friends and family without having to worry about storage. Now, that happens almost entirely on Whatsapp.

As a user, I can feel a difference in my connection with my gmail account. This is especially the case because I can contrast it to my [at] rohanrajiv.com email account – the default “reply to” email account for this blog. I look forward to every email on that account and it fills me with nostalgia about what email used to be. It is a dying breed.

Of my two remaining use cases (brands, cold emails), I suspect brands is the dominant use cases for most people.

That, then, brings forth a few interesting questions – would email, the product, be different if it was designed for communication with brands? For example, is there value in the “promotions” tab? Is there a better way to display sequenced offers? Could subscriptions (the more personal version of emails from brands) be given a separate, more personal area? Could ads be redesigned to better suit this new medium?

Email still remains one of my favorite mediums for communication. But, the design of most personal email clients seems to reflect use cases from a decade ago. It may be time for a rethink.

User feedback and sophistication

“The least sophisticated users tell you what you need to simplify and clarify while the most sophisticated users tell you what features you need to add.” | Paul Graham, Hackers and Painters 

Most things we build for other people – whether it is a business or presentation or product – will have consumers at both ends of the sophistication spectrum. The first step in synthesizing user feedback is to be clear who you are building it for – eliminate feedback that isn’t from your target audience.

Second, assuming you’ll still have users on both sides of the sophistication spectrum, building products that enable both novice and power users is key. And, an important step toward making that happen is to listen carefully to feedback from both ends of the spectrum. Expect your novice users to push you to simplify and expect your power users to do the opposite.

Then, it is on you to strike a balance.

That’s, of course, how we get made.

Why we expect crypto to be a big deal

It is easy to look at all the frenzy around Bitcoin and cryptocurrencies (I prefer using crypto tokens or simply “crypto” instead) and wonder – why is this all a big deal? We are never far away from talk of a decentralized, government-less world. If that all seems far fetched, that’s understandable.

The crypto boom is not a function of idealist technologists chasing some fictional future. Instead, when you boil it down, it comes down to two reasons – databases and incentives. Let’s work through 2 questions.

First, what do Oracle, SAP, PeopleSoft and Salesforce have in common?

Aside from being worth billions of dollars ($300B in market cap), each of these companies are/were database companies. There’s a lot of money to be made in databases.

We also know there’s a lot more money to be made by having the right kind of data. Google, by virtue of its near monopoly on American and, to a large extent, global search data is worth $750+ Billion Dollars. Facebook is worth in excess of $500B thanks to the fact that it knows more about the world’s adult population than any institution in history.

Next, what do stock prices, bonuses and taxes have in common?

Each of these are economic incentive systems. They drive hundreds of millions of people to work every day and ensure we have the means to fund the infrastructure to do so.

This combination of the value of databases and the data they hold and the power of incentive systems to drive behavior are why we expect crypto to be a big deal.

The challenge with a decentralized database.
I like revisiting the technological innovation underpinning the blockchain.

Until the blockchain came along, it wasn’t possible to have a decentralized database. So, we’ve always had central database owners – typically large corporations or governments – who held tremendous power because of the value of the data in them. (In rare cases, these databases are owned by foundations, e.g. Wikipedia. The challenge is that there are very few foundations because such foundations need to constantly fight for financial survival. The allure of making lots of money with the data is too strong for most. Automatic hat tip to the founders of large open source projects!)

Financial incentives aside, it made sense to have centralized database owners because decentralization, on the face of it, would present a few challenging problems. What if the folks maintaining the database changed records?

Enter the “crypto” part of the blockchain. Satoshi Nakamoto’s famous white paper laid out the design for decentralized databases with cryptographic security. That, in turn, has 3 characteristics (H/T Alex Rampell from a16z) –

  • Records can’t be faked / No alchemy
  • Records are immutable / No alteration
  • Owner/signer is unique / No impersonation

Now that we’ve solved the security problem, there are two other issues with managing creating and valuable databases. First, maintaining a database costs a lot of money. Facebook pays massive infrastructure costs to hold all its data. (Of course, it turns out that the value of all data far exceeds the costs.)

And, second, how do you get the sort of data that Facebook has managed to accumulate anyway? Facebook’s strength comes from the network of users within Facebook and the current regulatory regime around user data.

Let’s talk about the latter for a second. We live in a regulatory regime where corporations own user data. If this changed to a regime where users own their data, users could, in theory, take all their data and port it to a new social network they wanted to participate in with their friends.

The bootstrap problem. In the absence of user focused regulation, Facebook’s network strength is nearly impregnable. And, every network that attempts to compete faces what is known as the bootstrap problem. The bootstrap problem illustrates the challenge of starting a new network. Networks become valuable when you have more users. But, how do you get to critical mass?

This is particularly critical where blockchains are concerned as it takes a lot of work (computing power, energy) to maintain these cryptographically secure databases. So, why would people do it?

This is where Chris Dixon’s excellent illustration comes in.

As Chris illustrates, crypto tokens (or “currencies” in popular language) provide financial utility to the early adopters of the network and help it get to critical mass.

Image you start Bitbook – the blockchain version of Facebook. You could imagine an incentive system that looks something like this –
There will only be a total of 100 BitTokens.
10 BitTokens will be given to early investors for a cash value of $10M to build the network. This, in turn, will be used to pay for servers and compensate employees.
10 BitTokens will be saved for employee incentives.
10 BitTokens will be kept aside for developers who add value to the system.
10 BitTokens will be owned by the founders.
Out of the remaining 60 BitTokens, 20 will be awarded to the first 2000 early adopters as an incentive to try the network.
The remaining 40 will be paid out over time to new users and users who bring value to the network.
What could you use the token for? Well, you could imagine a small entry fee, a small fee for the ability to send messages to people you don’t know and a small fee to buy and sell in the marketplace.
So, even if the token may not be worth much now, it could be worth a lot once the network has grown to a few million users.
Imagine executing a contract like the one above – you need a large group of lawyers and will need to sort through a multitude of contractual details. But, thanks to the blockchain, you can just trust the code.

We also know that these systems can work. Bitcoin is the proof-of-concept of this combination of an incentive system and decentralized database that has worked. Now, of course, there are multiple other blockchains that have followed suit.

Blockchains without a token/currency make little sense. Most big finance companies talking about the block chain are really talking about tamper proof databases. But, as you can probably tell from the above illustration, it makes no sense to have a blockchain without a token/currency. In the absence of this, there is no incentive for participants to maintain this cryptographically secure database.

(The reason “token” is more accurate than “currency” is because “currency” assumes general purpose use. But, a token in a blockchain tends to be constrained for use within that network.)

It feels good to contribute to the body of open source/creative commons work. But, we also want to be paid.

In a sense, the blockchain makes open source objects financially viable by converting networks into peer-to-peer marketplaces.

Tokens/currencies need good governance systems. Now that we understand how central tokens are to the blockchain, it is easy to understand why good governance systems matter. In a nutshell, this is what good ICOs /initial coin offerings are about – experimenting with governance systems to ensure the sustainable growth of their network.

2017 saw a crypto investment frenzy. While 95+% of the ICOs will end up having zero value, we will likely learn a ton about good governance systems from the 5% that do succeed.

It is also unclear to me whether the completely decentralized model will work broadly. Large open source projects still tend to have influential founders (Linux, Wikipedia, etc.). We’ll need more experimentation to find out.

A brief note about the experiment that is Bitcoin. Bitcoin is an example of one use case of the blockchain. It is the star of the crypto show right now. This may continue to be the case in the future – it is hard to say. But, it is worth noting that Bitcoin is also an experiment that was designed to test if we might be able to create a cryptographic currency.

However, that experiment seems to be failing. Instead, it is emerging as a potential “store of value” – to replace gold.

For people who find the it weird to attach value to a virtual concept, take a moment to consider that we picked a random shiny looking metal from the ground and assigned tremendous value to it. Then, there’s also the fact that this storage and transport of this arbitrary metal is hard. It is also hard to track.

Just like digital photos replaced their analog counterparts because they were easier to store, transport and track, what if Bitcoin was a digital upgrade?

I’m not positing that it is. But, it just might be. And, that option value is worth something to many people.

That said, it won’t matter a great deal if Bitcoin fails. For those who see the power of these decentralized database and incentive systems, Bitcoins rise has just spurred some much needed investment. There are numerous problems to be solved – chief among them are scalability and energy use. But, with the amount of venture capital funding the sector has attracted, it is only a matter of time before top engineering talent figures solutions that work. In the spirit of discussing incentives, money is a powerful motivator.

If Bitcoin doesn’t work, we’ll design the next cryptocurrency that works.

Or, as Nassim Taleb eloquently puts it

Bitcoin will go through hick-ups (hiccups). It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated expresso macchiato at your local virtue-signaling coffee chain. It may be too volatile to be a currency, for now. But it is the first organic currency.

But its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.

Wrapping up. It is hard to discuss the potential of crypto without encountering ideas like the importance of decentralization, democratization and permissionless innovation. The believers will tell you that this is important – to make the world a better place and win back the internet.

But, solving climate change is important too. So is figuring out what happens to jobs in a post AI world.

But, as human beings, our behavior is driven by incentives. Currently, there isn’t a clear financial incentive to go work on climate change. So, there isn’t venture capital money pouring in and neither are undergrads hooking up computers in their dorm rooms to solve math problems to fix carbon emissions.

But, the world of crypto has that figured out.

And, when you combine powerful financial incentives with the inherent value in databases and the data they hold, you begin to understand why we expect crypto to be a big deal.

Links for additional reading

  • Beyond the Bitcoin Bubble by Stephen Johnson – on NYT (one the best long reads on crypto)
  • Chris Dixon’s post on a breakthrough in network design – on Medium
  • In code we trust – on NYT
  • The Blockchain man – on RibbonFarm (Fascinating)
  • Crypto boom funded by MIT – on Quartz
  • Trends in Cryptocurrency – on a16z
  • Alex Rampell on Cryptocurrencies at the a16z summit – on a16z (great overview)
  • Satoshi’s famous whitepaper – on Bitcoin.org
  • Nassim Taleb on Bitcoin – on Medium
  • A 3+ hour comprehensive podcast on how to think about crypto – on InvestorFieldGuide

Why we need to revisit the writing of Arthur Pigou

Arthur C Pigou, a British economist, wrote an important book called “The Economics of Welfare” in the 1920s. His argument in the book was that industrialists seek their own “marginal private interest” and have no incentive to internalize “marginal social cost.”

To illustrate this with an example – let’s imagine that an industrialist builds a factory in a previously quiet neighborhood. This factory will likely cause congestion and pollution. But, the contractor doesn’t get affected by these costs if all he does is pay rent.

This divergence has two first order consequences –

  1. The industrialist creates the social harm but doesn’t pay for it.
  2. As a result of not paying for the harm, he over produces and creates a net-negative social return.

Economists call such effects “negative externalities.”

Of course, this is all not academic. This is a graph of the amount of energy used by Bitcoin miners. In March 2017, Bitcoin miners used double the energy consumption of Nicaragua. This graph has continued to move upward with the surge in crypto activity in 2017.

The current estimate is that Bitcoin miners use as much electricity as all of New Zealand.

So, why still do so? Because it is still profitable. Or, to think of it as Arthur Pigou might have, it is still profitable sans the marginal social cost. The environmental footprint of this energy consumption makes no sense. But, that is at the heart of understanding the concept of negative externalities.

Pigouvian taxes. Arthur Pigou’s solution came to be known as a Pigouvian (or Pigovian) tax. This is a tax on any market activity that produces negative externalities. This is why we tax alcohol and cigarettes. Taxes are a very efficient mechanism to reduce negative externalities and prevent over consumption as it deters over production/consumption.

However, there is one important underlying assumption with Pigouvian taxes – they work best when our estimates of costs and benefits are correct.

As we all know, short term costs and benefits are far easier than measure than long term costs and benefits. And, given the fact that adding taxes is a sure shot strategy for a politician to give up hopes of re-election, it takes a really long time for us to tax areas where taxation would otherwise be an obvious solution.

Hence, we live in a world where there is no tax on sugar in carbonated drinks or on Carbon emissions – even though both have been shown to be harmful to us.

Regulating technology. The biggest challenge with regulating any businesses at the cutting edge is that it is unclear, for long periods of time, what negative externalities are. For example, even if it was evident to many individual users that using Facebook didn’t their improve mental well being, it wasn’t commonly accepted.

Now, of course, Facebook’s executives have admitted that Facebook was not the best way to use your time. And, they’re making changes to the news feed to fix that.

It is still unclear what the long term benefits of being addicted to social media are. I was in India recently and found myself surprised at the extent of the Whatsapp addiction amongst adults. My guess is that we’ll look back at these times the same way many look back at smoking in the US in the 1960s (i.e. we’ll ask – how the hell did we allow ourselves to do that?)

Of course, it is easy to point fingers at Facebook’s executives and accuse them of “hacking” our brains. But, they were people like you and me responding to financial incentives. The problem, more likely, is a blind belief in capitalism.

Unbridled. Seth Godin (who authors the best blog I’ve had the privilege to read) had a powerful post titled “Unbridled.”

There’s a school of thought that argues that markets are the solution to everything. That money is the best indication of value created. That generating maximum value for shareholders is the only job. That the invisible hand of the market is the best scorekeeper and allocator. “How much money can you make?” is the dominant question.

And frequently, this money-first mindset is being matched with one that says that any interference in the market is unnecessary and inefficient. That we shouldn’t have the FDA, that businesses should be free to discriminate on any axis, that a worker’s rights disappear at the door of the factory or the customer’s at the lunch counter–if you don’t like it, find a new job, a new business to patronize, the market will adjust.

Taken together, this financial ratchet creates a harsh daily reality. The race to the bottom kicks in, and even those that would ordinarily want to do more, contribute more and care more find themselves unable to compete, because the ratchet continues to turn.

The problem with a race to the bottom is that you might win. Worse, you could come in second.

There are no capitalist utopias. No country and no market where unfettered capitalism creates the best possible outcome. Not one. They suffer from smog, from a declining state of education and health, and most of all, from too little humanity. Every time that the powerful tool of capitalism makes things better it succeeds because it works within boundaries.

It’s worth noting that no unbridled horse has ever won an important race.

The best way for capitalism to do its job is for its proponents to insist on clear rules, fairly enforced. To insist that organizations not only enjoy the benefits of what they create, but bear the costs as well. To fight against cronyism and special interests, and on behalf of workers, of communities and education. That’s a ratchet that moves in the right direction.

Civilization doesn’t exist to maximize capitalism. Capitalism exists to maximize civilization.

Markets fail. The post is both poignant and powerful and drives home an important point – markets fail. Capitalism fails. There is no cure all.

Facebook’s recent admission was in contrast to the rise of their stock price (up and to the right). Bitcoin’s rise doesn’t consider the immense cost of electricity used to mine it.

These are just two examples of market failure in technology – among many.

As Arthur Pigou foresaw in the early 1900s, the challenge with capitalism is that it drives rational humans to irrational extremes because it doesn’t require them to internalize social costs. That’s why Pigouvian taxes matter. Taxes remind us of the negative externalities we create.

This isn’t a corporate thing either. Aeon had a thought provoking post asking the question – what would happen if we were all taxed on our energy footprint?

Would we continue flying around the world for leisure? Would we use disposable diapers? Would we still buy beef? Would we still buy gasoline cars?

As I grow older, I realize that the best way to predict human behavior is to take a look at the incentives. In the absence of self awareness (and there never seems to be enough of this flying around), we are our incentives.

We aren’t incentivized to think of the negative externalities we create. But, it matters that we do.

Taking more responsibility. For those of us either working in tech or aspiring to work in tech, it is so critical we think of these incentives and the behavior it drives. Once you are in an industry and environment that is growing, it becomes clear that the hard thing isn’t about making the next buck. It is about asking – “but, at what cost?”

It doesn’t have to be this way. Shareholder value need not be what we maximize. We just need to care enough to have the tough conversations around the consequences of what we do.

Or, as Seth might say – it is on us to remember that civilization doesn’t exist to maximize capitalism. Capitalism exists to maximize civilization.

(For my part – for every few posts where I gush about the prospects of artificial intelligence, the blockchain and so on, I’ll make sure I intersperse rants like this one to question blind beliefs on the brand of capitalism we take for granted. Thanks for reading this far.)

Links for additional reading

  • Bitcoin consumes as much electricity as New Zealand – on Vox
  • Pigouvian taxes – on Wikipedia
  • Unbridled – on Seth’s awesome blog
  • Everyone should be taxed on their energy footprint – on Quartz
  • Facebook’s newsfeed change – on Facebook’s blog

Quick note on these technology notes: This is a bi-weekly post as part of the “Notes by Ada” project. I send these as a weekly newsletter and experimented with posting these elsewhere. But, I’ve decided to share them on this blog one week after the newsletter goes out.

Genetic editing – a new era

There have been many moments in human history that changed the course of civilization and what it meant to be human. These were few and far between until the last 500 years or so during which we’ve had a cluster of inventions and discoveries due to a combination of science, imperialism and capitalism. Each of these seminal discoveries – transportation, computing, the assembly line, etc. – led to new eras.

A few decades down the line, I think we will look back at the time when we began testing gene editing as one of those moments. The Wall Street Journey had a story about how China, relatively unhampered by regulation, has proceeded with tests using CRISPR – the revolutionary gene editing technology. From the article –

Crispr, for Clustered Regularly Interspaced Short Palindromic Repeats, serves as the immune system in bacteria. In 2012, a team led by scientists in the U.S. and Austria published a paper demonstrating how they reprogrammed a particular Crispr system to enable gene editing.

The new tool—called Crispr-Cas9 after the natural system it uses—acts like molecular scissors, letting scientists cut or repair DNA. In 2013, U.S. scientists used it to edit the genome of human cells in the lab. 

The technology is easier to use than other gene-editing methods and less expensive. Lab experiments have shown it can correct some glitches that cause incurable diseases. Crispr has spurred heavy investment and a proposed Jennifer Lopez-produced television thriller.

Rewriting life’s building blocks, however, is fraught with scientific and ethical quandaries. One: Crispr might make unintended irreversible changes in people that may not emerge for years.

We’re still in the day one of the CRISPR technology. What happens when someone moves past fixing genetic diseases to other traits? Could we edit babies to have blue eyes?

I am sure we will have plenty of ethical debates and standards around CRISPR.

That said, I am also sure it will change what it means to be human.

Why you should invest in Crypto in 2018

Most folks look at investing in crypto in a one dimension fashion. Investing a portion of your financial net worth isn’t the only way to invest in new technology and reap great returns. Investing your time could pay off wonderfully well in the long run too.

And, I’d like to make the case that it is well worth your while to invest in understanding crypto in 2018.

We’re on the brink of something historic…

In his post reflecting on what happened in 2017, venture capitalist Fred Wilson shared the Perez Technological Surge Cycle. This is a framework by Carlota Perez — a Venezuan scholar on technology development.

If you look at the Carlota Perez technology surge cycle chart, which is a framework I like to use when thinking about new technologies, you will see that a frenzy develops when a new technology enters the material phase of the installation period. The frenzy funds the installation of the technology.

2017 is the year when crypto/blockchain entered the frenzy phase. Over $3.7bn was raised by various crypto teams/projects to build out the infrastructure of Internet 3.0 (the decentralized Internet). To put that number into context, that is about equal to the total seed/angel investment in the US in 2017. Clearly, not all of that money will be used well, maybe very little of it will be used well. But, like the late 90s frenzy in Internet 1.0 (the dialup Internet) provided the capital to build out the broadband infrastructure that was necessary for Internet 2.0 (the broadband/mobile Internet), the frenzy in the crypto/blockchain sector will provide the capital to build out the infrastructure for the decentralized Internet.

And we need that infrastructure badly. Transaction clearing times on public, open, scaled blockchains (BTC and ETH, for example) remind me of the 14.4 dialup period of the Internet. You can get a taste of what things will be like, but you can’t really use the technology yet. It just doesn’t work at scale. But it will and the money that is getting invested via the frenzy we are in is going to make that happen.

Fred has been bullish on crypto since he started investing in it in 2017. So, it makes sense that he’s calling it the next phase.

Or, are we?

Let’s consider the counter point — there was an interesting article on Hacker Noon recently that said the blockchain is most likely useless. Below are the headlines —

Everyone says the blockchain, the technology underpinning cryptocurrencies such as bitcoin, is going to change EVERYTHING. And yet, after years of tireless effort and billions of dollars invested, nobody has actually come up with a use for the blockchain — besides currency speculation and illegal transactions.

Each purported use case — from payments to legal documents, from escrow to voting systems — amounts to a set of contortions to add a distributed, encrypted, anonymous ledger where none was needed. What if there isn’t actually any use for a distributed ledger at all? What if, ten years after it was invented, the reason nobody has adopted a distributed ledger at scale is because nobody wants it?

The blogger takes all the use cases discussed so far and takes apart the rationale for a blockchain based solution. It is a fun read. Similarly, “Mr. Money Mustache,” one of the top personal finance bloggers on the internet had a post on “Why Bitcoin is stupid.” In it, he says —

The Cryptocurrency bubble is really a replay of the past: A good percentage of Humans are prone to mass delusions which lead to irrational behavior. This is a known bug in our operating system, and we have designed some parts of our society to protect us against it.

These days, stocks are regulated by the SEC, precisely because in the olden days, there were many, many stocks issued that were much like Bitcoin. Marketed to unsophisticated investors as a get-rich-quick scheme. The very definition of an unsophisticated investor is “Being more willing to buy something, the more its price goes up.”

Don’t be one of these fools.

Reconciling these points of view. Most of us come at problems with a selfish question — what’s in it for me? Or, put differently, is it worth investing in this?

Given this, here’s how I’d break it down. There are two investments we can make in new technology — money and time.

Let’s deal with money. There are tens of thousands of crypto tokens out in the wild. Many of them are nonsensical and some are ludicrous. All save a few will likely go down to zero in value in the next five years. Unless you are a crypto expert, it makes little sense to invest in “Initial Coin Offerings.” And, if you are an expert, you’re likely not reading this post anyway.

There are a few mainstream coins that are in the news — primarily Bitcoin and Ethereum. If you have tens of millions of dollars in net worth, buying a few Bitcoin — assuming it is in the low single digits of your net worth — may be an interesting experiment right about now. But, it’d still be an experiment. Investing in Bitcoin is what institutional investors and Billionaires are putting their money in right about now. So, for most of the rest of us, the time has passed.

In that sense, I agree with Mr Money Mustache’s premise — this isn’t the time to invest in crypto unless you’re open to speculating and experimenting with a sizeable portion of your wealth.

But, calling the blockchain worthless misses the point.

It takes multiple decades for a technology to get mainstream adoption. The foundations of the internet were set in the mid 1960s. Commercial use began in 1989. HTML and the idea of a webpage came by in 1994.

And, yet, it is only now that the consumer internet is mainstream. Businesses, on the other hand, are still moving to the cloud.

So, it might be 6 decades for the internet to become mainstream from when it was conceptualized and it will likely be 3 after promising infrastructure was built. These things take time.

If you want to understand why blockchains matter, think about databases.
We live in a data economy. The largest companies on the planet today own vast amounts of data in centralized databases. Their ability to use this data in more and more powerful ways (using tools like machine learning) is what makes them seemingly insurmountable today.

The core technology innovation underpinning the blockchain has made it possible to have decentralized databases. This was not possible before.

Thus, we can now build networks around these decentralized databases and create new incentive structures. In today’s world, the value of your data goes to a few large corporations. In theory, this would not be the case in a blockchain based world. That’s because anyone who contributes to a network would earn tokens based on a governance system created by the token creators.

Does this mean everything will be decentralized? Probably not. There is still value to centralization in many contexts. But, it doesn’t mean centralization is applicable everywhere either. We live in a world controlled by a few large corporations largely because we don’t have an alternative.

Blockchains promise a world where that might be different. They promise to take us down a path we’ve walked over the past century as we adopted newer pieces of information technology — more democratization and more permission-less innovation.

That’s why they matter.

And, that’s why it is worth investing your time in understanding them better in 2018.

PS: Of course, we’ll be spending plenty of time digging into crypto in future weeks.

Links for additional reading (with 5 of the notes mentioned above)

  • What happened in 2017? — on Fred Wilson’s blog
  • Why Bitcoin is Stupid — on Mr Money Mustache’s blog
  • Ten years on, the Blockchain is useless — on Medium
  • Centralization and Decentralization — on Notes by Ada
  • On Institutional Investor’s take on crypto assets — by John Pfeffer on Medium