Blockchain Protocols and the Future of Cryptocurrency

Back in 1995, there were only 30 million people using the internet. I’m choosing to look at 1995 somewhat arbitrarily – because I was born that year and it interests me to study how much has changed in the short time I’ve been alive, and because I think it’s a good year to draw comparisons to regarding the current state of blockchain technology. Back then, internet and web protocols were bigger than Amazon, CNET, or Netscape – those internet protocols enabled the digitization of information and were the first to allow for permission-less:

  • publishing of information
  • aggregation of information
  • exchange of information

 Relation to Cryptocurrency

Today, liberal estimates put cryptocurrency users at about 4 million. If we are to keep with this analogy, cryptocurrencies are certainly in their “early 90s” phase, but keep in mind that the internet has allowed for a much quicker exchange of information and it is likely that widespread adoption of this technology will happen a bit faster as a result.

It is clear that cryptocurrency enthusiasts are in the “innovators” portion of the adoption bell curve, it is yet to be seen how quickly adoption will spread.

Blockchains are the most innovative, disruptive, and exciting protocols in 20 years. They are beginning to create an “internet of money” because they enable permission-less:

  • store of value
  • aggregation of value
  • exchange of value

Web protocols allowed for programmable information in the same way blockchain protocols are now allowing for programmable assets. Moreover, I find blockchain protocols more exciting than internet protocols for a few reasons:

  • Due to the nature of the internet, information is disseminated much more quickly than it was 20 years ago. This has allowed for significantly more people to work on these new technologies and ideas.
  • Because these protocols are backed by currencies, in a sense users are able to “vote” on their favorite ones by buying the assets associated. In this way we are now able to create a more competitive environment that will benefit all parties involved.
  • Blockchain protocols are not limited to digitizing assets, they could be used for voting, supply chain management, securing and verifying identities, the list goes on and will surely exceed the expectations of anyone currently in the space, just as the internet did.

How Blockchain Protocols Will Disrupt Key Markets

If we look back at the digitization of information that occurred in the 90s, we can see that media was of course disrupted, but Amazon, Alibaba and others slowly began to upend retail through the creation of “eCommerce.” This was based on the digitization of information, products, and prices. Amazon did not outdo Walmart in logistics (at first). As disruptive as the last 20 years have been to media and commerce, it has been almost entirely due to the digitization of information. Even today, Amazon continues to grow as in-store commerce slowly declines. This is using decade old protocols.

Market caps of Walmart and Amazon since 2012

For the first time, we can now digitize assets. This market is much larger than media and consumer retail, which leads me to believe we will see a much larger disruption of key industries and markets in the coming decade or two. Here is some information that is very alarming and telling in my opinion:

  • Insurance revenues are 50% larger than the global media business
  • Financial services are 5 times larger than the global media business
  • Gold market cap is 7.5 trillion
  • Narrow money is 38 trillion
  • Broad money is 95 trillion
  • Cryptocurrency markets account for roughly 0.05% of total financial markets

Is it reasonable to assume that this reaches even a fairly conservative 1% of financial markets in the coming decade? I think so, and this would mean 20x of crypto markets. Today, nearly 100% of the media I consume is from the internet. 7% of retail is online. If you told someone these statistics back in 95, they would probably think you were crazy.

Financial markets are absolutely massive. Until blockchain protocols came along they were largely untouched by the disruptive forces of digitization and decentralization. This is no longer the case: I can send a wide range of digital assets almost instantly without going through bank hours, without paying large fees, across any border.

Let’s Talk “Trusted” Intermediaries

These third parties present a huge security hole (see: 2008, or more recently, the enormous equifax debacle) and blockchains will expose them for extracting an insane economic rent and causing friction across markets/borders. Anyone with family outside of the US who has tried to send money certainly knows how painful this process can be. And why, dear god why, do I have to wait 4 days to transfer money, or trade during specific hours of the day? How is this even considered “normal” still, in an age where we can get any information almost instantly? Blockchains will chip away at this model slowly, and then rapidly, as users go from millions today, to tens of millions, then quickly to hundreds of millions.

Blockchain Protocols and Cryptocurrencies Moving Forward

The financial services industry represents 7.2% of US GDP and takes in about 13 trillion globally per year. All of that will be in play for potential disruption. Just think about the disruption still going on with the internet using protocols that are 20 years old. What is going to happen to the global economy as assets are digitized by decentralized and programmable blockchain protocols?

Market cap of Bitcoin compared to other benchmark financial assets (July 26, 2017)

We are just seeing the beginning – blockchain protocols will most likely not even be the widely understood aspects of cryptocurrencies in the same way that internet protocols are almost universally misunderstood. How many people who use the internet even understand differences in HTTP and HTTPS? How about TCP or SSL protocols? What does this mean for cryptocurrencies? The Googles, Facebooks, Apples, and so on of crypto are probably not even here yet. Maybe we are just now seeing an Amazon or a Netscape, and almost certainly the majority of the existing market today will not be around when widespread adoption takes place in the same way Netscape disappeared years ago. I would argue search engines were a huge force in making internet protocols accessible to the masses, and the Googles of blockchain have not yet arrived.

In fact, we are still very much so in the age of protocols. Developers from around the world are racing to optimize network security and reliability while minimizing transaction times and fees. As protocols advance and mature, so too will the digital markets they support.

What This All Could Mean

All this is not to say or suggest immediate investment in cryptocurrencies. There are reasons institutional investors are yet to hop in, in the same way there were reasons Jeff Bezos had to borrow money from his parents and didn’t have investors fighting over the opportunity to invest in a brand new technology. Moreover, comparisons between internet and blockchain protocols are helpful in visualizing the potential cryptocurrencies have, but parallels to search engines and web pages don’t really make sense in terms of blockchain. Companies that bring crypto to the masses will need to be as innovative as Google was, but in entirely different ways.

Cryptocurrencies are still extremely volatile, not nearly liquid enough, and most probably in the early stages of a bubble similar to that of the dot com bubble nearly two decades ago. However, an investment in 95 amazon may have lost you money during the bubble, but it would have made you very wealthy in the long term. There is a reason so many in the cryptocurrency space preach the hold philosophy.

The digitization of assets might not even be the most disruptive aspects of blockchain technology, but that is for another article.

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