Sunday Reads #124: A new blockchain based Internet is coming

And it's going to be amazing.

Hope you’re keeping safe and sane. It is a troubling time in many parts of the world.

Welcome to the latest edition of Sunday Reads, where we'll look at a topic (or more) in business, strategy, or society, and use them to build our cognitive toolkits for business.

If you’re new here, don’t forget to check out the compilation of my best articles: The best of Jitha.me. I’m sure you’ll find something you like.

And here’s the last edition of my newsletter, in case you missed it: Sunday Reads #123: The Grand Unified Theory of Management.

This week, let’s talk about blockchains. Yes, speculation in crypto is fun. But blockchains are just about to change our world. A new Internet is coming, and it’s going to be amazing.

Next, let’s look at a very easy (and silly) way to hack the human mind (for a good cause).

Here's the deal - Dive as deep as you want. Read my thoughts first. If you find them intriguing, read the main articles. If you want to learn more, check out the related articles and books. Oh, and do subscribe if you haven’t 😊.


1. A new Internet is coming.

Different things excite different people about the blockchain. No trusted third party. Smart contracts. Security. What excites me most, is that as more things get done on a blockchain, we will have a science fiction Internet.

What do I mean by a "science fiction Internet"?

As regular readers of this newsletter know, I LOVE science fiction. Not the dystopian / nuclear winter kind of trope, but more techno-optimistic.

One of the things I find fascinating about these worlds, is how their economics work.

Philip K. Dick (author of Minority Report, and one of the most popular sci-fi authors of the 60s and 70s) once wrote about doors that you pay per use. You install a door in your house, and you pay a tiny amount each time you open it.

Another author wrote about cars that can negotiate right of way with each other. If you're in a hurry, you can ask the car ahead of you to let you overtake them.

Then you have various attempts at a Metaverse, a virtual world where people transact in a myriad strange ways.

I call this a science fiction internet. And it's soon no longer going to be fiction.

Blockchain and crypto will bring this Internet to life. Through three fundamental paradigm shifts (I hate the phrase, but for once, it fits):

  • Today's Internet is a "fat application" Internet. The blockchain enables a "fat protocol" Internet.

  • The blockchain pays for itself (and pays you for the services you offer it).

  • The blockchain lowers transaction costs immensely.

I'll explain these below. But if you take these three things together, the result is a foundationally different Internet. And a fundamentally different world.

  • Safer internet

  • Democratized entrepreneurship

  • Radical markets. In everything.

Let's see how this will happen.

First, What is a Blockchain?

Quoting Vitalik Buterin, the founder of Ethereum (link)

A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible, and which carries a very strong cryptoeconomically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies.

There is no Microsoft / Facebook hosting the blockchain. There also isn't a large server somewhere that's storing everything and doing computations.

Instead, everything is happening on a publicly visible "blockchain" of data, stored and validated by a large number of nodes.

It's a magic computer.

A. Today's Internet is a "fat application" Internet. The blockchain enables a "fat protocol" Internet.

A blockchain-based internet will be a fat protocol Internet.

The best way to explain this is to see how the Internet is structured today.

The computer engineers among us would have studied the TCP/IP protocol:

The entire Internet today runs on this protocol. Whether you're using Facebook, Instagram, or you're keying info into your Salesforce CRM - it's working on the TCP/IP protocol.

Despite being the one and only common layer of the internet, TCP/IP stores almost no data of value.

Who stores the data? Facebook. Instagram. LinkedIn.

In today's Internet, the applications are "fat", and the protocol is "thin".

You can't create another Facebook. Ok, you can. But no one will go there. Because everyone's personal profile is on Facebook (the application). Not on TCP/IP (the protocol).

In a blockchain based social network (doesn't exist yet), things would change. Quite a bit.

A blockchain is a protocol that stores state / data in the protocol itself.

All your profile info will be stored on a blockchain (encrypted of course, so only your friends can "poke" you).

You no longer need Facebook to serve your newsfeed. If you don't like Zuckerberg, you can use ProfilePack instead ("I don't like the name, but they don't serve sneaky ads.").

You can use any application you want. The data is in the protocol.

Facebook or Twitter or whatever else becomes just the "interface" to review your feed. You decide which application you want to use, and the social protocol links you up in a second.

Today, even if your product is better than Facebook, it doesn't matter. Facebook's network effect is too strong.

Tomorrow, the only basis of competition will be customer service. If you provide a better service, you can defeat Goliath. Or to be more precise, there will be no Goliath.

Peter Thiel said perfect competition is bad for business. But businesses be damned, it's great for consumers!

Crypto wallets are a perfect case in point.

Take digital wallets - e.g., in India, we had PayTM, Mobikwik, etc. All of these were closed, semi-closed, or open. If they were open, you could transact between different wallet providers. But your money, at any point of time, would reside in one wallet. i.e., in the application. If you want to use your PayTM cash in another wallet, you first need to transfer it (usually with an intermediate step of transferring into a bank account).

In contrast, crypto wallets are interoperable in a completely different way. They're just the skin on top; your money is stored on the blockchain.

When you first install a Crypto wallet (like MetaMask), you can put some money into it and encrypt it with your private key.

Tomorrow, if you install another wallet (say Trust Wallet), you can use your private key to withdraw the money from there too!

The wallet doesn’t itself hold any money. The wallet is just a mechanism to access your money on the blockchain.

B. The blockchain pays for itself (and pays you for the services you offer it).

Storage of data is not the only way in which today's Internet has thin protocols and fat applications. It's the case with capture of value as well.

HTTP doesn't hold any value. Every single thing on the Internet (and many things off the Internet) runs on HTTP. But it captures zero value.

All the value is in Facebook and Google.

If you accept payments using Stripe, you pay fees to Stripe. Not to the protocol. You pay Google for storage. You pay Facebook (with your attention).

The blockchain changes all this. You don't pay any company for using their service.

You pay the blockchain.

And the blockchain automatically pays agents that provide it a service (e.g., token miners, validators, etc.). All the rules for payment are right there - encoded in the chain for all to see.

No adult supervision needed.

This new dynamic between the protocol and application layers creates a positive feedback loop where everybody wins.

As Joel Monegro says in Fat Protocols,

When a token appreciates in value, it draws the attention of early speculators, developers and entrepreneurs. They become stakeholders in the protocol itself and are financially invested in its success.

Then some of these early adopters, perhaps financed in part by the profits of getting in at the start, build products and services around the protocol, recognizing that its success would further increase the value of their tokens.

Then some of these become successful and bring in new users to the network and perhaps VCs and other kinds of investors.

This further increases the value of the tokens, which draws more attention from more entrepreneurs, which leads to more applications, and so on.

This leads to another interesting and new dynamic: the protocol always captures more value than the applications on top.

What’s significant about this dynamic is the effect it has on how value is distributed along the stack: the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer.

You may have heard Ben Thompson talk about "The Bill Gates Line" (link):

The Bill Gates Line: "A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”

Well, the blockchain is the Bill Gates Line on steroids.

Let's call it the Vitalik Buterin Promise.

Everyone who participates in a successful blockchain, creates value for themselves.

C. The blockchain lowers transaction costs immensely.

The first two points are interesting for sure. But this is where the penny drops.

Taylor Pearson says in Markets Are Eating The World:

In his 1937 paper, “The Nature of the Firm,” economist R.H. Coase asked “if markets were as efficient as economists believed at the time, why do firms exist at all? Why don’t entrepreneurs just go out and hire contractors for every task they need to get done?”

Coase’s answer was transaction costs. Contracting out individual tasks can be more expensive than just keeping someone on the payroll because each task involves transaction costs.

Imagine if instead of answering every email yourself, you hired a contractor that was better than you at dealing with the particular issue in that email.

However, it costs you something to find them. Once you found them you would have to bargain and agree on a price for their services then get them to sign a contract and potentially take them to court if they didn’t answer the email as stipulated in the contract.

Duke economist Mike Munger calls these three types of transaction costs triangulation, how hard it is to find and measure the quality of a service; transfer, how hard it is to bargain and agree on a contract for the good or service; and trust, whether the counterparty is trustworthy or you have recourse if they aren’t

Well, with the blockchain, all three types of costs plummet:

  • Triangulation: Everything is transparent on the blockchain. You don’t have to call twenty people to find a service provider. They’re right there, ready to provide a service at a pre-defined price.

  • Transfer: Nothing to bargain. The terms of the smart contract are coded within the blockchain itself!

  • Trust: The blockchain is trustless. As Vitalik says in the definition up top, the blockchain guarantees that the programs will continue to execute in exactly the way that the protocol specifies. You're not at the mercy of any industry titan.

And so:

Putting it all together.

A fat protocol will ensure stability and safety.

No rogue application will be able to play havoc with your data. No Cambridge Analytica.

The community succeeds together.

Today's internet monopolies concentrate all the value for themselves. They are not "platforms" in the true sense. YouTube makes far more money from ads than the creators who upload amazing videos.

In tomorrow's internet, there is no "company" that captures the value. Instead, everyone gets a piece of the pie - the creators, the investors, the service providers.

Markets become ubiquitous.

The corollary of Coase's theorem above is: When transaction costs tend towards zero, we will do a LOT more transactions.

Today, many services are "too cheap to meter". For instance, you don't pay anything when you send someone an email. It imposes a teeny-tiny but real variable cost (packets of data have to be transferred), but you don't pay anything. The costs of doing the transaction would be much higher than the transaction itself. And really, it's not possible to pay anyone a thousandth of a dollar.

Not so with the blockchain. You can pay someone a 100 millionth of a bitcoin.

You will pay for everything on demand.

Some parts of our economy have already moved from "pay to own" → "pay to use". Ride-sharing, Airbnb, gig economy, etc.

Soon, everything else will follow.

To take just one example. Here's how a typical day on the road would look:

  • You don't buy a car. You pay your "smart car" only when you use it. You're not paying Uber. You're actually paying your car.

  • You're a little late to your meeting, so you pay the car ahead of you to allow you to overtake them. This happens automatically. No bargaining, no honking, and no exercise of middle fingers.

  • You don't buy car insurance either. You just pay premia when you're driving. The premium increases for 10 min each time you take a sharp turn. And reduces a little when you stop at a light.

  • Let's say you have a minor accident. This is what would happen. 👇

In this new world, everything gets valued at its true cost, however tiny.

This will have some pleasant side effects.

No one spams you anymore. After all, it's prohibitively expensive to send an email to 10000 email IDs. Especially if it has certain suspicious patterns.

No hacker can mount a DDOS attack on your website, just because they don't like you. The cost per million pings is too expensive.

This is just the start. Blockchains will change the world.

Further Reading:

Drop me a line if you'd like me to write more about crypto and the blockchain. It's what most excites me about the Internet today.


2. How to hack the human mind (for a good cause).

The state of Ohio started pinning a lottery ticket to every vaccination card. And then this happened:

We've spoken about temporal discounting before, in How would you discount your life?

In the graph above, as we increase the discount rate, the more the initial years matter.

The higher the discount rate, the more importance you place on the short-term vs. the long-term.

And the converse is also true. The more importance you explicitly place on the short term, the higher the implicit discount you're applying on the long-term...

Long time horizon → Discounting the future at a low rate → The future matters a LOT. Focus on exploration. Search for golden eggs.

Short time horizon → Discounting the future at a high rate → The future matters less. Focus on exploiting. Kill the Golden Goose.

Humans discount the future at a very high rate. We don't just discount the future, we do hyperbolic discounting.

You can see it in the graph - the higher your discount rate, the less the future matters to you. At a high enough discount rate, something that provides value in 10 years, doesn't matter to you at all!

An action that delivers a lot of value in the long-term, is far less attractive than something that gives you value NOW. However small.

If you have a free hour, you'd rather binge watch the latest season of your favorite show, than stand in a queue.

As Alex Tabarrok says in Staple a Lottery Ticket to Every Vaccination Card:

Vaccination is all about immediate costs and future benefits and it’s more difficult to act on future benefits than immediate costs, ala hyperbolic discounting.

A free beer, donut, or lottery ticket provides an immediate benefit to offset the immediate cost and so may encourage vaccination, especially for those who are very present oriented.

Note, however, that a lottery ticket might be expected to be less beneficial than an equivalent-cost donut because the donut is truly immediate while the lottery ticket is not. On the other hand, if vaccine hesitancy is driven by over-estimated fear of rare side-effects then perhaps a lottery ticket balances with an over-estimated hope of rare-benefits.

Tabarrok's second point is important too. Anyone who is over-discounting the future is also likely to over-estimate their odds of being lucky. So, give them a lottery ticket!

Hong Kong got into the act too!

And, I'm pretty sure this will work.

Is there a lesson for us here?

Yes.

No, it's not that humans are stupid.

Rather, it is this: If you want people to take an action with long-term benefits, give them short term incentives too. No matter how small or banal.

Free beer. Free donut. Cash. Maybe even something less valuable than cash (like a lottery ticket).

This becomes even more important if there are public goods involved (public health, good roads, parks). Any public good suffers from the free rider problem. We will want to take more from the common pot than we put in.

Well, this is how we defeat the free rider problem:

...a lottery is a natural counter to free-riding.

Imagine that there is a public good but no one contributes because they each hope to free ride off other people’s contributions. As a result, the public good is not provided.

Now introduce a fixed prize lottery. If no one else contributes then a contributor wins the lottery for certain so it can’t be an equilibrium for everyone to free ride.


3. This made me laugh.

And, how would you caption this chart?

My vote: "TV is an idiot box".

Lucky I watch Netflix only on my computer...


That's it for this week! Hope you liked the articles. Drop me a line (just hit reply or leave a comment through the button below) and let me know what you think.

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PS. I’m slowing down a little bit for the next few weeks. Will be back to weekly soon!

As always, hope you’re staying safe, healthy, and sane.

Until next time,

Jitha