You want to know the one thing about cryptocurrency reporting that drives me mad? It’s not just from the mainstream press either – the specialised press is even more guilty, if that’s possible.
If I counted on my fingers the number of articles a week that use an image with a physical bitcoin, I would need more hands.
Why do so many articles insist on representing bitcoin as a physical thing? It’s not.
And insisting on presenting it that way – as if us humble humans are incapable of grasping the concept unless we can see it – is condescending.
It speaks to our comfort with the visual.
Most of our development as humans has been building on what we can see. The realm of ideas has traditionally been left to the philosophers, while money and power typically went to the engineers. It’s one of the many reasons art has had such a pull on us over the centuries. Ideas that we can’t see are hard to wrap our heads around.
And everyone knows that money means coins, right? (It doesn’t.)
To be fair, understanding finance is not for everyone – ledgers and compound returns are not straightforward. And if seeing a bitcoin helps us accept that it is real (or, as real as anything gets in the money world), then, sure, let’s use images.
As long as we hang on to the notion that money has to be physical, we won’t fully understand the underlying implications. And, it puts physical boundaries around an abstract concept while anchoring us in the limitations of the past.
The very press that strives to help us understand how this new technology will impact the way we see the world, is perpetuating the old paradigm. It needs to stop.
I just got back from a talk given at the MediaLab Prado in Madrid on the role of blockchain in the media. An impressive panel did a good job in conveying the potential impact on journalistic independence, through immutability, anonymity and funding.
The latter is the part that I find most interesting: media finance.
Ad-funded models don’t seem to be working (with exceptions). Subscriptions are tough (though some manage to pull it off). Crowdfunding platforms are having a hard time going mainstream, and micropayments are technologically complicated. Fiat currency micropayment platform Blendle seems to be growing, but is not releasing revenue nor profit figures.
Unless… unless… micropayments can be managed via the blockchain? The problem is the clunkiness of the user interface. No way am I going to go through a payment process for a few cents every time I want to read an article.
“Seamless” micropayment integrations, such as Brave could be a potential solution, if it manages to get enough media to participate*. It seems like the most complicated part is loading up my Brave wallet and indicating preferences (I haven’t done it yet… I will, I will…). Satoshipay, a bitcoin-based micropayments platform, could be an alternative, although it appears to require a bit more input from my part. CoinDesk published yesterday an intriguing account of cryptotokens used to fund content, reward engagement and grant access.
While I believe that these avenues need to be explored more, I worry about our resistance to change. We realize that the model doesn’t really work now, but I don’t want to have to alter my reading habits. I also don’t want to see ads. I pay for subscriptions to a ton of sites, I even donate to some, but I accept that I am in the minority. And even I don’t want to switch to micropayments, because it’s an added layer of hassle in an already pretty tight schedule (I know, I hear you, “prioritize!”).
I don’t think that the audience is ready for a fundamental shift. Which means that we will watch while media gets squeezed and independence becomes more expensive. And we need independent journalism for independent thought.
Unless we can start to change how we perceive journalism, at “entry level”. I’m talking about educating the young on the importance of paying for what we consume, of calling out things we think are wrong, of valuing differing but well-expressed opinions, and of the economics of publishing.
How else can we engineer a societal shift in how we perceive content economics? How else can we wean a culture off of free content? How else can we inculcate the idea that information is a product, and the good stuff is worth paying for?
Too general and utopian, I know. But we need to start somewhere.
One of the more interesting questions tonight was about the potential conflict between immutability (cited as a support for independent journalism – no-one can censor or edit your writing) and truth (if what you’re writing is false, should it be immutable?). There isn’t yet a clear answer to this, but one of the panelists suggested ratings, much like Uber drivers. But good ratings can be given because the reader likes the writer’s work, even if it is misleading. Who rates the raters?
*CoinDesk, for whom I work, is part of the Brave platform
I was asked this morning if I thought that there was too much hype around the blockchain.
The question, as phrased, is much more complex than it seems. A simple “Yes” or “No” would be completely misleading.
Is there hype? Yes.
Is there too much? No.
And by “no”, I don’t mean that the hype is at just the right amount. By definition, the word “hype” implies “too much”. In other words, I’m not sure that “hype” can be effectively quantified. It’s like saying “I’m a little bit pregnant”. (I’m not, if you were wondering!). You either have hype, or you don’t. From Wikipedia:
“Hype (derived from hyperbole) is promotion, especially promotion consisting of exaggerated claim.”
According to Google Dictionary, hype (verb) means
“To promote or publicize (a product or idea) intensively, often exaggerating its benefits”.
Both definitions, and most of the other ones I found, stress the exaggeration part, without claiming that all hype is inflated. But the implication is there.
So, we don’t have too much hype. However, I am convinced that blockchain technology is not the revolutionary change that the media and even industry experts seem to think. It is a revolutionary change, for sure. And the creative uses emerging across sectors are very, very interesting. But the potential uses are more limited than we are led to believe. And the hurdles in the way of its widespread adoption are much higher.
I’ll happily go into those limitations in more detail in a later post (lots to talk about there). Today I want to explain why I think that the hype, although potentially misplaced, is a good thing. Why we don’t have “too much”.
It’s all about marketing.
Virtually all hyped campaigns promise more than they can deliver. And technological innovation is especially guilty of that. Remember the promise of the paperless office?
To put this into perspective, I thoroughly recommend the paper by Gartner (2011) on hype cycles. You’ll have no difficulty recognizing where the blockchain is. Mass media hype begins? Check. Supplier proliferation? Check. Activity beyond early adopters? Almost.
The report goes into much more detail, giving a list of signs that a technology is at the peak (italics = my comments):
The trade and business press run frequent stories about the innovation and how early adopters are using it.It’s not exactly correlated, but here’s the number of times “blockchain” has been searched for in Google Trends:
A popular name catches on in place of the original, more-academic or specialist engineering terminology; for example, the wireless networking technology called 802.11g became “Wi-Fi.”“Blockchain” is pretty catchy.
Simple, highly exaggerated, nonspecific declarative marketing slogans appear, such as “I have cloud power” and “cloud is the answer.”Uh huh. My favourite so far is “The possibilities for universal disintermediation across all verticals enables [sic] unfathomable, unforeseen opportunities.” I actually find myself saying similar stuff at parties. I don’t get invited to a lot of parties anymore.
A surge of suppliers (often 30 or more) offer variations on the innovation.We’re way beyond 30. My preliminary list is up at around 50.
Suppliers with products in related markets align their positioning and their marketing with the theme of the innovation.Yes, that’s happened. Non-blockchain technology providers are either pivoting or adding the service.
Suppliers can provide one or two references of early adopters.Many early adopters go on to set up their own suppliers.
Toward the end of the peak, one or two early leading suppliers are bought by established companies in expensive, high-profile acquisitions.There has been a ton of M&A activity in the sector. More to come, I imagine. And a list to follow.
So, there is no question that the blockchain world is swimming in hype. Here’s why I don’t think that that’s a bad thing:
One, it’s part of the natural cycle of evolution. Blockchain, as a new technology that has real potential, needs to go through the Gartner cycle. It hasn’t become an industry standard for nothing. The sooner we get through it, the sooner we can put the resulting “trough of disillusionment” behind us and get on with the real work of implementing the efficiencies across sectors.
Two, it’s all about marketing. To get enough industry players interested (and by that I mean all industries), the blockchain needs some powerful marketing. Change is difficult even when it’s obviously needed. The blockchain revolution is not obviously needed. We’ve been getting things done, sending payments, transferring assets and verifying documents just fine for years. When it’s not obviously needed, the resistance to change is very high. In fact, it can probably only be overcome by unrealistic hype. More accurate marketing, along the lines of “this is a new way of structuring distribution that will probably improve efficiency but we don’t really know what the cost or the unintended consequences are going to be and by the way it’s really complicated”, won’t attract the same kind of eager attention that the blockchain needs. The blockchain needs that eager attention because it needs industries in which to test itself. It needs experimentation, exploration and investigation, and without the hype, willing participants will be more difficult to come by.
Now, I’m not advocating reckless exploration. I’m advocating carefully trying things out. R3CEV’s approach to carrying out tests with a consortium of banks seems like a sensible approach, and one that I’m sure (= hoping) many other blockchain service providers will emulate. Would it have managed to convince so many big names to join the experiment if the hype were not at almost peak level? Probably not. But the fact that it did pushes the boundaries of what we know about the possibilities into the realm of practicality, and brings forward eventual implementation. That’s very exciting.
So, yes, there’s hype. And, yes, quite a lot of it is misleading. But it’s a necessary phase for a strong contender for “revolutionary technology of the decade” (no hype there). Without it, we wouldn’t be as far along as we are. And we wouldn’t have the momentum to take us through the next phases and eventually reach practical implementation and successful innovation.
According to the Urban Dictionary, the word “hype” can also mean a lot of other things: a type of drug user, a sarcastic reaction to something that’s not that exciting, and something that’s really cool, fun and noisy. I’m going to go with the last one. Blockchain technology, with all its limitations and upcoming disappointments, is totally hype.
The struggle and the patience paid off. This morning the Gemini bitcoin exchange opens for business, after a year-long process of getting regulatory approval from the New York State Department of Financial Services (NYSDFS). This authorisation is pretty big, much broader than the infamous BitLicense that the state requires of bitcoin operators. And Gemini is only the second exchange to get this approval. All of which is interesting, but not as interesting as the big picture behind it: this is the biggest step so far that Bitcoin has had towards going mainstream.
Let’s rewind a bit. First, the regulatory approval. A NYSDFS license, which grants permission to operate as a chartered limited liability trust company, is more rigorous and tougher to get (and I imagine a lot more expensive) than the BitLicense that New York requires of bitcoin operators. So why did the founders, Cameron and Tyler Winklevoss, choose this more complicated route? Because their main target market is institutional investors, to whom they would not be able to offer a complete service with just a BitLicense. The trust charter license that they now have allows them to 1) hold deposits, 2) operate a bitcoin exchange, and 3) offer other corporate trust services such as escrow (holding funds pending contract resolution). A BitLicense wouldn’t allow Gemini to do that. More importantly, the charter obliges the firm to act as a fiduciary, which means that it has to always put its customers’ interests before its own. That that even needs putting into law is sad, but this is the new frontier of financial services, and we’ve all seen the worrying headlines. For the Winklevoss twins, winning the trust of the large institutional investors is key. They felt that a BitLicense just wasn’t enough.
Gemini has competition. In May itBit was granted the same permission, and also offers OTC (over-the-counter) trading. And Coinbase classifies itself as a US-based bitcoin exchange, although it does not yet have the necessary regulatory approval.
But how will Gemini help Bitcoin to go mainstream? First, security. Safety has been the main priority, which is smart given the fears over Bitcoin’s lack of security and the “unregulated” nature of most exchanges. The founders have apparently been thorough in their dealings with the regulators, insisting on approval before trading. They are currently authorised to trade in 26 states and Washington DC, and are working on getting approval in the remaining areas. Customer deposits are held in FDIC-insured US banks, which means that the deposits are protected by federal insurance up to $250,000. And bitcoins are held in “cold storage”, which means offline devices such as pen drives, kept in vaults. (I’m not implying that itBit doesn’t make security a priority, the FDIC also insures itBit-held funds, and they also use cold storage for bitcoins… but read on…)
Another priority seems to be the visualization of information, also smart given that Bitcoin is quite hard to get your head around, and buying on online exchanges is confusing for first timers. Simplicity inspires confidence. The Gemini interface lets users visualize a graph showing the effect that their trade is likely to have on the market, even if it’s a small one. Get people familiar and comfortable with the idea of buying bitcoins for their investment portfolio, and you’ve gone a long way towards bringing Bitcoin into the mainstream.
Which will tie in very nicely with the upcoming launch of the Winklevii’s Bitcoin ETF (Exchange Traded Fund), the first publicly traded bitcoin-based investment trust. The twins are counting on more and more funds and private investors deciding to hold modest bitcoin positions, but without actually buying bitcoins (because either they don’t want to, or they can’t for regulatory reasons). These investors will be able to buy a NASDAQ-listed investment trust that will reflect the currency’s movements, but without direct exposure. The trust is awaiting regulatory approval.
At the moment the only alternative currency traded on Gemini is Bitcoin, although they haven’t ruled out changing that (notice that they didn’t put “bit” in the exchange’s name). In a Reddit AMA last night, there was some interest expressed in the trading of Dogecoin and Ether (the Ethereum currency). Tyler’s response was along the lines of “first Bitcoin, lots to do there, and then we’ll see”, so it’s unlikely that the portfolio of possible trades will spread much beyond BTC/$ in the short term. They are looking at opening up to other currencies, especially the Euro, but that will involve a lot of regulatory work, and the potential volume may make it not worthwhile.
So, what’s that about mainstream? Well, the Winklevoss twins are famous, not just because of their Facebook history. They’re media-friendly very wealthy ex-Olympic athletes. To give you an idea of their lifestyle, they came across Bitcoin for the first time while on holiday on glamorous Spanish island Ibiza. They’re New York elite, championing an alternative currency, and assuring their influential friends that institutional bitcoin investments will be safe and will do well. itBit is a reputable firm with a stellar management team and undoubtedly a good product, but without Gemini’s star power. This guarantees a certain amount of media attention. As a rudimentary metric, the number of entries that come up when you type “Gemini + bitcoin” into the Google search bar is over 480,000. Type in “itBit + bitcoin” and you get just over 87,000. So, the photogenic and well-connected Winklevoss twins are more likely to get Bitcoin into the mainstream press than equally able competitors.
And, there’s the emphasis on institutional funds. While their first customers are more likely to be early-adopter individuals, they plan on building up enough liquidity to attact the larger funds and Wall Street players. Until now, most Wall Street and bank activity in the sector has been through blockchain applications. Few have actually waded into bitcoin investment or trading. When that happens, the currency and the concept will get a credibility boost.
Which brings up the underlying existentialist dilemma. Bitcoin going mainstream would be good for the currency, increasing both liquidity and value, making some early purchasers wealthy, and attracting even more traders and investors. But, Bitcoin was not built on mainstream foundations. It started out as a decentralized, anti-institution concept, in part as a reaction to the financial crisis and the institutions that made it worse. So if those very same institutions start investing and trading in bitcoins, what happens to its reason for being? Does that even matter, when its use and value could significantly increase? Is Bitcoin embracing the institutions and the government, or is it the other way around?
Bitcoin has been hailed as the saviour of microtransactions, small payments of cents or even less that up until now have not been an option due to simple economics. Traditional online payment methods charge fees for transactions that they process, be it mobile payments, credit card transactions, or direct transfers. You’re not going to pay 2 cents cost for a 2 cent transaction, are you? Enter Bitcoin, a frictionless, decentralized system that allows anyone to send any amount of money anywhere in the world for little or no cost. Hello, efficient and cost-effective microtransactions.
Only it doesn’t work like that.
Bitcoin is not useful for microtransactions.
Here’s why: On the Bitcoin blockchain, most payments will eventually need to include a transaction fee to incentivize the miners. Why do miners need to be incentivized? Because running the powerful computers that perform the validation functions is expensive, due to the hardware needed and the electricity consumed. Miners get rewarded with new bitcoins every time they successfully validate a block, but the amount of bitcoins they get halves every four years and will eventually reach 0. Transaction fees, a sort of voluntary “tip” added on to each transaction, will become more important to the miners – if there’s no transaction fee attached, they might choose to leave your transaction out of the block, in favour of a more lucrative operations. And as the block size limit is approached (unless the community can agree on an increase), space will become scarce and allocated to those transactors willing to pay extra. Transaction fees, however small, make micropayments less viable.
Yet nature, sorry, programming abhors a vacuum. Brilliant minds are working at coming up with a way to make micropayments easy and cheap or even free.
One of the most-talked-about micropayment solutions is the Lightning Network. This proposal is an efficient way to process transactions, even micro-transactions, faster and cheaper than one can on the blockchain. It’s a clearing network that sits on top of the blockchain, and eventually settles on it. But until then, it can pass around payment information in a secure and trust-less fashion (trust-less means that you don’t need to know or even trust your payment counterparty). And because there are no miners that need incentivizing, transaction fees are low or even non-existent.
To understand this better (because it’s darn complicated), visualize a Bitcoin earth with lots of payment channel spikes leading up to little moons. Each Lightning user can have one or several spikes. If he or she has several, each leads to a different moon. It’s a bit like having several bank accounts, or several bitcoin wallets. Your choice. And the moons have thin tunnels leading to some of the other moons. In my case, say I have only one spike (I’m a simple soul, really). I upload some bitcoin to my spike. Say I want to send a payment to you via these payment channels. The transaction goes up to my moon, which then figures out the quickest route through the thin tunnels to your moon. It then trickles down your spike to you.
This may sound inefficient, but it’s not, and it’s how the Internet works today. This packet of information that you’re reading found its way to your screen via a convoluted yet efficient route of hubs, it didn’t get to you directly. But it got to you quickly.
So, since the transaction is just between me and you, and doesn’t have to be broadcast to all the nodes, it’s almost instantaneous. And, since no miners are involved and there are virtually no costs (except perhaps a payment channel creation and/or maintenance fee), it’s almost free. When we’re done transacting, we can bring the transactions back down to the Bitcoin earth for settlement. It is not as secure as Bitcoin, but with microtransactions, that shouldn’t be an issue worth worrying about. And it is much more convenient.
The Lightning Network is in development, with no release date announced yet. But the idea is generating buzz amongst developers and Bitcoin enthusiasts alike, who see it as a way to make Bitcoin more efficient without losing the decentralisation. Stand-alone implementations (that don’t need the blockchain) are being built for testing, and crypto think-tank/developer Blockstream has started Lightning application development.
Strawpay’s Stroem protocol (a Swedish company, be grateful that they didn’t insist on Ström) is very similar, with a few technical differences that I confess I don’t quite understand yet (working on it). They seem to be a bit further along the development rail, but they are making a lot less noise and receiving a lot less attention. Amiko Pay is another potential contender for a role in Bitcoin micropayments, but it is in early stages still.
So who will be the first to launch? My money is on Lightning. Keeping hefty brainpower focussed takes money, as even programmers need to eat. I mentioned earlier that Blockstream has begun work on the Lightning Network, hiring a specialized developer. Late last year Blockstream secured a $21 million funding round from 40 investors, including top venture capital firms. A few months ago Strawpay received a 500,000K (about $60,000) grant from the Swedish government, which is better than nothing, but probably won’t last very long.
The race is on, and the stakes are high. If we have access to an efficient micropayment platform, imagine what that can do for the media industry. It will be possible to pay per article read. The music industry could find a viable, fair business model. We could pay cents for each song listened to, and artists could receive income directly from listeners. Telephone bandwidth in which you pay by the minute, streaming in which you pay by the episode… With minimal overheads, the costs to the consumer would be low and proportional to consumption. With minimal overheads, the creators or originators receive more for their creation or service. And the economic boost to the intersection of creativity and quality will have ripple effects in culture, business and finance. Exciting.