I have taken a deep breath and made the decision to pretend I am 25 years old again and dive into the world of crypto head first. For a veteran like myself, it has that “dotcom” feel to it.
The only point of this post is to begin to decipher (decrypt) Web 3 and crypto. This will not be conclusive or arrive at any A Ha! moment. It will raise more questions than it answers. It´s just the start of an intellectual journey. And there will be more posts to come. If you are already neck deep in crypto and consider yourself “in the know” then stop here and go back to your coffee. If you´ve been reading about crypto, heard about crypto, think you might know a bit about crypto, have no clue about crypto or are just in general either very curious or very skeptical (or both), then maybe read on.
I very much welcome corrections or questions by the way.
Here we go.
Right away, my main issue is just how esoteric it seems and how theoretical. It exists beyond The Cloud and into The Ether and I am unable to physically grasp it.
But what is undeniably intoxicating is the dominant overall theme of “fixing what´s wrong with the internet today” when I speak to people who are building using a blockchain.
The web of yesterday and mostly today is based on proprietary client server architectures. The purported web of tomorrow, Web 3, (as purported, that is, by VC and crypto early adopters) will be a decentralized peer to peer architecture with a blockchain, which, as I can best understand the term, is a public ledger of transactions.
A key notion that has come up early in my talks with pioneers like Jacobo Toll Messia, Founder and CEO of Nahmii.io, somebody with whom I´ve drunk powerful, mindbending coffees for nearly a decade now, is the idea of “trustlessness” as a result of this decentralization and blockchain. I will do a full deep dive post on Nahmii soon.
And openness. Anybody can build and integrate into Web 3. In Web 1 and Web 2, you often need permission. We´re dealing mostly with closed systems and environments today.
Allow me a first cup of coffee Moulton Think:
I could have kept going because it´s actually quite fun to think and sketch it out that way but let´s keep it super simple (and by no means complete, just a paint brushstroke) for now.
As best I understand it, the notion of trustlessness in Web 3 means that you do not need to trust anybody. There are no middlemen in your transactions. A transaction is permanent and exists in the blockchain, a matter of public record, open to inspection.
I am by no means a network architect and will not attempt to dive too deep into peer to peer networking here, but as I understand it scale is a real challenge.
You see in this bleached white world of trustlessness there is nevertheless the notion of consensus based “validation” of transactions. This is where I think to myself, ok, then clearly somebody is not entirely trusting the trustlessness because we have people / machines validating. But nevertheless, the notion of trustlessness is a powerful and useful one as an inspiring paradigm (if not in reality, really, a governing paradigm upon laser eyed inspection).
Every time a transaction is conducted on a blockchain the transaction data will be stored in a new block. This new block will then be added to the blockchain.
However, before this new block (and the information contained within) is added to the blockchain, it must be verified using mathematical equations, run by machines on the global peer to peer network. This is called a proof of work model.
Enter yet another new term of the day for you - “hash.” And yet another new term - “mining.” Or at least they are new terms for me at any rate. I mean, I´ve heard the term mining (of course) in the Web 3 context before today but have not really dug into it, and “hash”? Well, that one is completely new (I used to think it was an essential component of a southern breakfast).
(Here is where you suddenly wish you could go back in time and study cryptography theory.)
A hash is literally just that. You hash (mix) something up (a valuable piece of data for example, like a contract - we´ll get to “smart contracts” in a bit) so that it can be sent unrecognizably to another destination, like somebody´s phone or computer. Input whatever you want, the output (a hash digest) is of a fixed size (a 64 character text for example). It´s a one way function. In hashing, given an input, you can compute the output. Taking an output and reversing to compute the input however - nearly impossible.
Hashing is commonly used to store passwords in a database for example.
Here´s the rub: solving the hash for a bitcoin block requires a large (enormous) amount of computation. Thus bitcoins get mined over a long period of time, not all at once.
Miners “solve blocks,” ie validate. And when a block is validated, all of the transactions in that block are locked in, which adds to the permanent record, the ledger, of all previous transactions.
The blockchain.
Got it? Good. Let´s move on then.
Not Sustainable Today
I have spent some time crafting the sustainability message of Sensar Marine this year. I advise Evoy, the pioneers of high output electric boat motors, and I work closely with the Founder and CEO of GreenPowerHub, Europe´s leading platform for trading green energy certificates.
So it´s a bit difficult for me to reconcile my excitement for what I am perceiving to be a fundamental new web structure, a true paradigm shift, with the amount of computational power it requires for mining and validating the blockchain.
According to a BBC report last February , “bitcoin consumes more energy than Argentina” in a year, around 121 terawatt hours.
And according to Digiconomist, the carbon footprint of Ethereum annually is comparable to the country of Finland.
Further, it is estimated by Investopedia that 65% of the world´s bitcoin miners sit in China, and China is a country heavily dependent on the consumption of black energy, coal.
And as the price of Bitcoin and other “proof of work” cryptocurrencies go up, so does the computational fervor, the competition between miners for earning the rewards that are generated from being first to validate a block on the chain.
Having said that …
Token Economics
You need to understand first and foremost that this is the birth of a new investment asset class. Blockchain is the new technology platform, yes, but Token Economics is the economic theory that drives the creation of digital native currencies (coins and tokens) that then fuel the creation of applications and products on the blockchain.
It´s new? It´s old in fact.
We´ve all heard the phrase “your dollar ain´t worth the paper its printed on.” What is a US dollar ultimately but a statement of trust? I trust the US won´t collapse. I trust in the fundamental long term health of the US economy. I know there´s a huge population of people who are willing to accept my US dollar for something (hardly worth a stick of bubble gum these days, but still). The US dollar works because it is a utility for trading goods and services, ultimately.
The future of the Norwegian kroner? Well….that´s for another post.
Cryptocurrency 101: Coins vs Tokens. In a nutshell, coins like Bitcoin, Ethereum, XRP come with their own “standalone” blockchain. Tokens, on the other hand, live on a blockchain but do not have their own blockchain.
You could argue - in theory - that a digital currency is superior to government backed currencies. After all, the US dollar is ultimately controlled by the central bank. A digital currency is decentralized and governed by mathematical rules established upfront, transparent for all to read, and controlled by a community stakeholder consensus.
You can have an inflationary model, a deflationary model, a dual token model, and yes, there are even some experiments with asset backed digital currencies.
I am not going to go into pros and cons right now, just an outline.
The below is a simplistic summary - again, just to start to wrap our collective heads around it.
Bitcoin started deflationary. There is a set limit to the number being created, and, no matter the demand, there will never be more created. Bitcoin has a maximum supply capped at 21,000,000 BTC.
However, the more I read and discuss with Jacobo, I realize, as the FT puts it, Bitcoin looks disinflationary right now.
Ethereum started inflationary. The total supply of ETH was determined in the cryptocurrency’s 2014 pre-sale. 60,000,000 ETH created for contributors to the pre-sale, 12,000,000 ETH created as a development fund, and the annual issuance is capped at 18,000,000 ETH per year - as I understand it.
But Ethereum is moving from Proof of Work to Proof of Stake in a major Ethereum upgrade dubbed Eth2, which will make mining obsolete. This is also in hope to address the need for massive computing power and the resultant energy consumption / environmental impact highlighted above.
There are slight variations on the inflationary model in the cryptcurrency market. For example some issuers limit token creation yearly, and others are based on a set schedule in perpetuity.
Right when you thought you were getting it, let me muddy the water.
There is also a dual token model. And it´s frankly confusing to me still. But I am finding it quite common and I am being pitched on it now so we must clearly wrap our heads around it at least in top level form for now. There are also apparently security, read US security law, reasons for creating two token classes - in order to avoid compliance issues as the SEC has not clearly classified crypto assets, unlike securities, stocks, or bonds.
One token is created as a store of value token or a “governance token” as they are commonly called in crypto. The other is a “utility token”.
Let me take Ontology as an example and use their language. I am not promoting or vouching for Ontology - I just found it as a pretty clear outline of a dual token approach.
Ontology functions a dual-token model using an architecture that supports scalability and high volume, rapid, low-cost transactions. The ONT and ONG tokens are both essential to the ongoing operation of the Ontology public blockchain.
The ONT token serves as the primary means of both storage and transfer of value on the Ontology network. Holders of the ONT token can also vote on proposed changes, upgrades, and direction of the project.
Fees and transactions on the Ontology network are paid for using the ONG token. Deploying smart contracts, for example, uses ONG in the process. ONG keeps the network’s transaction costs predictable, providing a friendly operating environment for users and developers alike.
By staking ONT in exchange for ONG rewards, users can contribute to the security and stability of the network
And finally asset backed digital currencies, dubbed “stablecoins” like Tether, which purports to be US dollar backed. But this is a company plagued by controversy and allegations of fraud. The Attorney General of New York has flat out called them liars.
The Gemini dollar, however, is fully one-to-one backed with the U.S. dollar. For every GUSD issued, there's a U.S. dollar in an audited bank account.
Supposedly stablecoins are to provide just that, a sense of stability in the market, with the idea that more traditional investors might enter the market if they know there is a reserve asset (ie gold) behind the currency.
These are worrisome, actually. You could see how a growing world of stablecoins (to entice the mainstream) arguably underpins the entire crypto community right now.
What if What if.
Enjoyable primer. A quality of good writing for me is to be able to make the complex accessible! I would have never read this without Substack GO. I have a couple of friends in a social circle who mine bitcoins. We ended up discussing it at a gathering. Long before the blockchain existed, the precursor was heavily regulated industries that faced mandates to manage their products for their lifetimes. Examples in my career were the requirements to manage and document the lifecycle of measurement of instruments in environments like nuclear power. Later examples were the requirements post J&J for pharmaceutical manufacturers to retain enough data to manage recalls of any conceivable product. A great example is luxury goods. The blockchain is of course many steps beyond that but is very interesting. I posted about the topic in a lighthearted post a few months back. If you are interested I would share a link.
Enjoyed this Kelly! I am a lurker of crypto/defi/NFT/DAO and like other's takes on the fundamentals until it really... sticks. Keep it up!