Cryptocurrency in the Wild Wild West of the World Wide Web

Blockchain + cryptocurrencies could be the biggest threat to today's top tech platforms.

The Top Tech Platforms Continue to Accelerate Their Dominance.

Alibaba’s best-ever revenue forecasts caused “gasps of wow” from investors by topping analyst expectations by 10%.
Amazon has secretly become a giant bank, announcing it’s invite-only Amazon Lending service launched in 2011 has already surpassed $3B in loans and is expanding to more of the 2M businesses on its 3rd party marketplace in the US, UK, and Japan.
Apple Pay is already the #1 contactless payment service on mobile devices, just added 24 new banks and credit unions, and just launched P2P payments via iMessage (which could enable them to disintermediate credit card players and capture 9x more value per transaction)

The Top Platforms Have Many Moats.

Today’s top platforms have leveraged the evolution of the web, cloud, and mobile, to build massive leads across many traditional moats.

They have created proprietary software that placed them as the primary interfaces between users and systems of record, enabling them to control end user interactions and becoming dominant systems of engagement.
Great end-user interactions created networks effects leading to significant economies of scale and scope.
Their dedication to customer centricity created brand and customer loyalty and a widespread, integrated ecosystems that has created high switching costs..

But their biggest moat of all my be in AI: using all the data they collect across their ecosystems to enable another massive moat: systems of intelligence.

Because what makes a system of intelligence valuable is that it typically crosses multiple data sets and multiple systems of record.
This can build a virtuous cycle of data because the more data that gets generated to train an AI on, the better the AI, and therefore, the product becomes.
Ultimately the product becomes tailored for each end user, further increasing switching costs.

And according to Alibaba: “Today, worldwide, companies that have the resources and platforms to truly develop artificial intelligence technologies are fewer than five.” Here’s an example of how Alibaba is making AI part of the user experience:

Taobao’s mobile app offers a feature called Taobao Headlines, a consumer information platform that serves up stories and articles to users according to their interests.
Consider the case of a mother of a child with serious skin allergies whose doctor recommends she use soft cotton gauze towels for her baby to minimize irritation.
She buys the towels through Mobile Taobao.
The next time she opens the app, Taobao Headlines has recommended an article offering advice on dietary supplements for infants with allergies.
The mother had not searched for this information—the E-commerce Brain algorithm had already learned that many women who buy cotton gauze towels are also browsing information on child allergies.
After reading the article, the mother might then become interested in purchasing dietary supplements for her child.

What makes Alibaba’s AI especially powerful is that data is integrated not just from Alibaba shopping websites but throughout the company’s ecosystem of owned and affiliated internet assets, including transaction and credit data from e-payments service Alipay, location data from location-based services provider AutoNavi, search data from mobile browser UCWeb, and content consumption data from video site Youku.

This not only results in a broader dataset of behavioral information for better recommendations, but also means Alibaba can recommend offline local services—not just products—in real-time.

But these platforms increasing dominance is fueling concerns about competition and data privacy - including worldwide calls for regulation.

Platforms Have Prospered through the Centralization of Data.

The Internet and web were created as open platforms that anyone — users, developers, organizations — could access equally.

Companies competed on a level playing field because they were built on decentralized networks and governed by open protocols.
HTTP as the underlying protocol of the web allows for decentralized publishing - anyone could operate a web server and publish their own content and anybody with a web browser could access that content.

But the original Internet protocols defined only how data was delivered, not how it was stored. This lead to centralization of data.

But HTTP needs a data layer for any application functionality, which is where companies such as Google and Baidu (search), Facebook and WeChat (social), Amazon and Alibaba (commerce) have made their moat.
Because we didn’t know how to maintain state in a decentralized fashion it was the data layer that was driving the centralization of the web that we have observed.

But this centralization has given them the power to control the user experience and other companies access to consumers, reducing the openness of the web, potentially limiting competition and restriction innovation.

The Biggest Threat to Platforms Could be Blockchain and Cryptocurrency

The emergence Blockchain has been hailed as the emergence of a new kind of internet that re-envisions how we create that originally intended decentralization through fat protocols.
The 3 things about most blockchain-based protocols that can cause decentralization to happen:

A shared data layer, reducing the power of platforms to control and benefit from centralized data.
The cryptography systems that enable “trustless computing” transactions, potentially reducing the need for centralized organizations to control transactions.
The introduction of cryptographic tokens with some speculative value that get automatically distributed to users for creating, powering, or engaging with blockchain applications, creating new forms of crowdfunding and collaborative economy opportunities.

This trifecta can lead to the creation of an all new ecosystem by:

Giving all participants access to a single, decentralized, repository of data.
Providing a security layer that is enforced by cryptographic code, not a centralized group of people.
Automatically distributing financial rewards to participants who opt-in, not a centralized corporation.

This is creating an entire new category of companies with fundamentally different business models at the protocol layer.

A New Ecosystem is of Blockchains and Cryptocurrencies is Emerging. Note: There are many many technical details around into how this all works - both in practice and theory - that I will not go into here. Instead, we will look at what’s happening and why it’s different. There are 2 dominant Blockchain networks today: Bitcoin and Ethereum.

Bitcoin was introduced in 2008 by anonymous creator Satoshi Nakamoto’s as a decentralized payment system that operates on a cryptographic protocol built on an underlying technology now known as a Blockchain.

On this system, users send and receive Bitcoins “Tokens”, the networks units of cyptocurrency using bitcoin wallet software.
The Bitcoin Blockchain stores the “bank account” and through the development of cryptocurrency exchanges.

Ethereum is a blockchain network that allows developers to run “smart contracts”

Ethereum has a corresponding “cryptocurrency” token called Ether.
Ether tokens are automatically distributed to participants who do things to support the ecosystem, like “miners,” who provide the computing power to run the network.
Third-party developers can write their own applications that live on the network, and can charge users - in Ether - to sell their services and generate revenue in the ecosystem.
Ether can be used to buy these services created by developers across the Ethereum ecosystem.

Already, dozens of exchanges have arose in many countries to facilitate the conversion of “real” fiat currencies like dollars or yen into these digital cryptocurrencies like Bitcoin and Ethereum.
One way the cryptocurrency community is thinking about Bitcoin and Ethereum: as a new form of internet infrastructure.

In this case, owning an cryptocurrency “Token” is less like having a dollar, but more like owning a piece of the networks infrastructure.
And if the value of these networks grow by enabling applications built on top of them, these value of the cryptocurrency token will increases in tandem with the value of the overall infrastructure.
In cases where there’s increasing demand to use this infrastructure, like Bitcoin and Ethereum, the value of these cryptocurrencies can rise.

The Tokenized Decentralization of Funding and Blockchain Applications for X

Developers are already building blockchain applications on top of Ethereum or Bitcoin for a wide range of use cases, like:

Distributed computing platforms (decentralized AWS)
Prediction and financial markets (decentralized betting, insurance, and investing)
Incentivized content creation networks (like Reddit, but users can get paid into cryptocurrency for engaging with the platform)
Attention and advertising networks (like Facebook, but users get paid to view ads)
The expectation: many more networks will be invented and launched in the coming months and years - we could see a “blockchain network for x.”

A reason this could explode faster than anticipated: The Ethereum “infrastructure” enables Initial Coin Offerings (ICOs).

This is an all new path for crowdfunding blockchain-based applications by giving these applications a way to create their own new cryptocurrency tokens and launch them on top of the Ethereum network.
These ICO “crowdsales” are Kickstarter-style crowdfunding in which any internet user can use existing cryptocurrency like Ether to buy tokens of a new cryptocurrency.
Theoretically, these tokens are useful (by providing some value in a blockchain application), are tradeable and as such, these tokens have a price.

This makes tokens a new model for funding open-source technology, not just startups.

Because tokens have a price, they can be issued and sold en masse at the inception of a new protocol to fund its development, similar to the way startups have used Kickstarter to fund product development.
The money is typically received in digital currency form and goes to the organization issuing the tokens, which can be a traditional company or an open source project funded entirely through a blockchain.
In the same way that boosting sales is an alternative to raising money, token launches can be an alternative to traditional equity-based financings — and can provide a way to fund previously unfundable shared infrastructure, like open source.

Important: In 2017 to date, more money has been raised through ICO investments ($327M) than traditional VC funding ($295M) for the first time ever.

So as startup IPO pipeline seems wobbly, there have already been hundreds and hundreds of ICOs with many more on the way.
Recently, the Brave browser ICO raised $30M in 24 seconds for their new Basic Attention Token.
And trying to avoid being the disrupted vs the disruptors, the top tech VC are already finding ways to invest via tokens.

Notably, the is currently no legal or regulatory framework for this emerging type of offering.

It’s tricky though, because tokens aren’t really equity: a token sale is more similar to a ticket for access to future products or sale of paid API keys than equity crowdfunding.

Signals of Change. How Fast is this Moving?

Bitcoin launched 8 years ago. Ethereum launched 2 years ago. And interest and activity is growing rapidly:

Already, every major country has a digital currency exchange, nearly every major financial institution has a team working on blockchains, and major corporate consortiums continue to emerge.
LinkedIn advertisements for Blockchain talent are surging.
Bitcoin Price Ticker is the Top Paid Finance App in the Apple Store.
The boom in cryptocurrency mining is causing a shortage of AMD graphics cards.

But it remains to be seen whether or not Blockchain technology will truly enable decentralization or will be a new technology component of centralized players (Maybe it will be both?)

Startup Chain enables enterprise-grade blockchain infrastructure, and recently helped orchestrate a live blockchain integration that successfully connected Nasdaq's stock exchange and Citi's banking infrastructure, with several similar networks currently in the works.
Meanwhile, VC-backed startup Colu is open-sourcing its banking infrastructure to enable central banks issue their own digital currencies.
Major blockchain startups like Coinbase have strategies to expand the ecosystem further and faster.
Fidelity is mining Bitcoin and will soon allow its clients to see their holdings of bitcoin and other virtual currencies held on Coinbase on the its website.

Bitcoin and blockchain applications are also happening outside of financial services as well.

US telecommunications AT&T has been awarded a patent for a bitcoin-powered ‘decentralized and distributed home subscriber server’ device.
A group of energy firms including BP have completed an energy trading pilot using blockchain tech and the industry recently launched a consortium with the aim of developing more use cases for blockchain tech.
ERP vendors are working to integrate blockchain technology as a trackable, immutable record for everything from shipping manifests and supply chains to equipment maintenance and dispute-resolution systems.
The Dubai government has partnered with UK startup ObjectTech to create digital passports using blockchain tech.

Currently, the market cap of Bitcoin and Ethereum combined is ~$51B.

That accounts for a little less than half of the ~$104B market cap of all cryptocurrencies combined.
The top 5 centralized platforms - and overall public market leaders - Apple, Google, Microsoft, Amazon, and Facebook have market caps between $448B and $808B.

Of note: it’s still early and this is very much the wild wild west of the world wide web.

But tokens can create better-than-free business models, where users make money for being early adopters and can spread the wealth and align their userbase behind their success.
These sorts of incentives challenge platforms with by enabling developers to create new proprietary software that give new players control of end user interactions.
New types of end-user interactions along with financial incentives for engagement on new networks can created new networks effects.
And blockchain at the intersection of blockchain and AI could have access to an even larger pool of data than that centralized inside of platforms today, potentially creating all new, powerful systems of intelligence.
Maybe the most viable use of blockchain is the creation of the world’s largest supercomputer?
Either way, as the dominant disruptors in today’s technology wave - centralized platforms - are increasingly becoming highly centralized incumbents with massive moats, a future where they risk becoming the disrupted is already starting to emerge.