What follows is a brief summary of where the blockchain industry has come from over the past 10 years, where (I think) it’s headed over the next 10 years — and a lens to help understand why. It’s lighter on the deep-history and heavier on the more recent and forward-looking perspective.
Where we’ve come from
Bitcoin Emerges (Jan ‘09)
Bitcoin launches in Jan 2009. Initially, awareness is limited to a small handful of people. Over the next 3 years, Bitcoin receives an increasing amount of media attention — but still very minor relative to what it receives today. 99% of people that hear of Bitcoin dismiss it — and not unjustly.
After all, in its infancy, Bitcoin is still a crazy, far-out idea with implications that are difficult to appreciate. Even most people cognizant of Bitcoin’s potential implications are skeptical — after all, there have been many prior attempts at creating digital, non-sovereign money.
Given the limited track records and limited economic value at stake, it’s easy (and not unreasonable) to dismiss Bitcoin at this point.
Bitcoin hits parity with the USD (Feb ’11) then rallies to $100 (Mar ’13), then $1K (Dec ’13)
The rapid price appreciation quickly shifted the narrative from ‘something that won’t work’ to a comparison to ‘tulips’. Suddenly, pundits were universally ‘reminded’ of an event in the Netherlands that happened 300 years before any of them were alive.
At this point, understanding and appreciation of Bitcoin’s decentralization and resiliency was severely lacking — most pundits simply stated that Bitcoin would clearly be “shut down”. Wrong.
Alongside the rise of Bitcoin was the rise of infamous darknet marketplace ‘The Silk Road’ which lent itself well to a new narrative that “Bitcoin will only be used by criminals”. Wrong again.
Bitcoin “crashes” from $1k to $200, “blockchain not bitcoin” emerges(2014–2016)
Bitcoin skeptics feel vindicated by the price decline: “See, tulips, I told you”, “now that Silk Road is gone, nobody will use Bitcoin”. Wrong again.
Importantly, this led to a major shift in the industry’s narrative to “blockchain not bitcoin”. The idea was to harness the power of the technology without dealing with the digital assets built atop these networks.
Again, not an unreasonable idea for a 101-level understanding — which, admittedly, is nearly everyone at this point in time, even industry insiders. Powerful new technology can be difficult to understand.
This led to a race to ‘blockchain’ all the industries from healthcare to energy.
Bitcoin re-emerges & broader “crypto” steps into limelight (2017)
After 2–3 years of ‘blockchain not bitcoin’ and hundreds of pilots and ‘PoCs’ (Proofs of Concept), ‘blockchain not bitcoin’ implementations failed to bear fruit.
There’s myriad reasons why these efforts failed to generate significant value but, most importantly, three main reasons:
1. Open networks are more powerful than closed networks — see intranets vs the internet
2. The digital assets native to these chains are the critical component that makes these chains functional and useful
3. ‘Private blockchains’ are really a re-hash of database architectures that existed long before Bitcoin — nothing new here
Meanwhile, Bitcoin re-emerges — really, it never went away — but it storms back into public awareness with more users, more transactions, better security, and more supporting infrastructure than ever.
The broader market and industry begins to acknowledge and accept that open networks beat closed networks over time — that public blockchains like Bitcoin that allow anyone to participate and anyone to build atop are the root and core of the blockchain opportunity. People begin to realize and accept that Bitcoin and “crypto” isn’t going away.
This led to a mainstream rush to find and launch a ‘better Bitcoin’. Surely if Bitcoin was the first iteration, we can do much better, right? Again, not an unreasonable idea.
Around this time and in the years following, there was a rush to create new public blockchains that made tradeoffs to optimize for one (or more) particular feature(s). In this period, we saw the launch of chains that optimized for various features such as speed / throughput, privacy, and expressiveness.
Adding fuel to the fire, many of these experiments were funded via ICO which exacerbated the interest in launching experimental chains with different tradeoffs and optimizations. While there were many well-intentioned efforts and a few that had genuinely interesting technical optimizations, most were ill-advised experiments with inferior tradeoffs relative to what already existed in the wild — and because this industry’s complexity demands specialization, it was difficult for most outsiders to separate the wheat from the chaff.
These were all experiments being launched and tested in the wild in an effort to see whether their optimizations would be sufficient to drive traction and, ultimately, surpass Bitcoin in terms of adoption and utility. Each of these chains optimized on one particular front at the expense of another — there is no free lunch here.
New chain tradeoffs / optimizations fail to sufficiently differentiate(2017–2019)
The launch of new chains with different tradeoffs and optimizations marked a battle to become the standard — the base blockchain for the future of programmable money. Too often, industry insiders and outsiders alike focused exclusively on the technical tradeoffs as the leading indicator of potential to be the foundation of programmable money.
Of course, this has proved to be an excessively narrow scope of evaluation — as history has proven repeatedly, standards are rarely determined by “best-tech”.
As it turns out and the market has subsequently validated, Bitcoin was the ‘0 to 1’ moment — the step-function leap in progress. Some newer chains offer minor improvements (going from ‘1 to 1.1’) but most really just make inferior tradeoffs relative to what Bitcoin offers (going from ‘1 to 0.5’).
Overall, in evaluating the probability of any of these chains or coins surpassing Bitcoin two thresholds must be met:
1. ‘Does your set of tradeoffs actually present an improvement over Bitcoin?’ The vast majority — if not all — don’t pass this first test.
2. “Is your ‘improvement’ sufficient to overcome Bitcoin’s network effects, brand, distribution, security and first-mover advantages?” Despite myriad optimization experiments, no chain has successfully offered a sufficiently compelling advantage to overcome Bitcoin’s established (and rapidly expanding) network effects, brand, distribution and security.
As a result, most of these new chains — many of which feature a shiny new “breakthrough” consensus algorithm — are the equivalent of Chinese ghost cities: Seemingly beautiful designs and construction that lack organic demand.
Where we’re going
From lateral competition to vertical construction
While the prior period marked a lateral battle to become the foundation underpinning the future of programmable money, the market will continue to coalesce around 1 (or, at most, a couple) winning protocol(s).
Overall, even inside industry participants drastically over-weighted the probability that a new chain would surpass Bitcoin.
In reality, it’s not an even race: Bitcoin has a massively disproportionate probability of taking the lion’s share of the market over the next 10 years. Nobody cares about the 2nd best email protocol after SMTP.
This is a winner takes most market and Bitcoin is the far and away leader — by any metric.
Why? Bitcoin has more users, more value at stake, more awareness, more onramps, the best supporting infrastructure and, arguably, the most prudent set of ‘tradeoffs’ in the public blockchain landscape (one that emphasizes security, long-term scalability, and perfectly predictable monetary policy).
To make matters even more challenging for competing chains, securities regulators in the US and elsewhere have made it clear that fundraising and launching a new chain/coin is a legally dubious proposition — giving Bitcoin somewhat of a (unnecessary) regulatory moat.
Bitcoin’s dominant position is reflected in the sampling of charts below — there’s many more that could be added that effectively all tell the same story. In a winner takes most market with first-mover advantages and network effects, it’s objectively difficult and far-fetched to imagine any of the competing chains surpassing Bitcoin at this point.
Data as of 5/22/19 — Source: OnChainFX
Source: @ceterispar1bus (twitter) Data: OnChainFX & CoinMetrics
In short, Bitcoin has already come a long way from its humble beginnings: Only six years ago, few people had even heard of Bitcoin —and even those who had largely regarded the fledgling digital asset as a“tulip phenomenon”.
In contrast, as of Spring 2019, 89% of the American population has at least heard of Bitcoin and the younger generations are diving in head-first: Among those aged 18–34, 60% are familiar with Bitcoin, 59% see Bitcoin as ‘a positive innovation in financial technology’, 48% think it’s ‘very’ or ‘somewhat’ likely that ‘most people will be using Bitcoin in the next 10 years’,and 42% say they’re ‘very’ or ‘somewhat’ likely to buy Bitcoin in the next 5 years. (source: https://medium.com/blockchain-capital-blog/bitcoin-is-a-demographic-mega-trend-data-analysis-160d2f7731e5)
So where do we go from here?
From here, the building begins in earnest.
That’s not to denigrate the engineering efforts behind all of the new chains that have launched but to emphasize that this next phase of building will produce the layers, protocols, applications and services that will actually be used over the next decade — in contrast to the vast majority of chains which don’t see any meaningful economic traction (“ghost cities”).
Development and building activity will shift from launching insufficiently differentiated new chains to improving and building “up the stack” of the winning protocols.
In many ways, this phase is already well under-way: the Lightning network is a 2nd-layer/protocol built atop the Bitcoin network that facilitates fast, cheap, peer-to-peer Bitcoin transactions. Similarly, there’s several dozen (if not hundreds) of companies and developers that have built infrastructure, applications and services for Bitcoin.
As this vertical construction plays out we will continue to see more supporting infrastructure emerge as well as a lush and diverse ecosystem of applications and services emerge that facilitate a wide range of functionality for Bitcoin as programmable money. This industry began with a financial asset (Bitcoin) and financial infrastructure (the Bitcoin blockchain) and in the years ahead will continue to find the most utility in the realm of (non-sovereign) programmable money.
Importantly, this transition will take years to play out: We’re still in the onboarding phase of Bitcoin — which is why exchanges have been the most profitable crypto companies to-date, much like how ISPs were the most profitable internet companies in its early days.
Of course, these phases aren’t strictly sequential: While we’re only in the first or second-inning of the onboarding phase, the Bitcoin stack and the applications and services that it supports will emerge concurrently and accelerate the onboarding phase.
Bitcoin has and will continue to undergo many ‘phase transitions’ in the years ahead. Namely, Bitcoin will continue to transition from a volatile and speculative commodity — which is how it is (not unjustly) viewed today — to broader recognition as the empowering foundation of programmable money.
A new dynamic at play
There’s an important dynamic at play as the Bitcoin stack emerges: Changes to the base-layer are intentionally slow*, deliberate and careful — there’s no ‘playful tinkering’ when there’s $100B+ of value at stake. As such, changes to the Bitcoin protocol itself require network-wide consensus from (nearly) all key economic stakeholders.
In contrast, building up the Bitcoin stack has a different dynamic: developers can innovate and iterate quickly because these are opt-in protocols, layers, applications and services that don’t put the underlying network at risk and don’t require network-wide consensus. For example, the lightning network could suffer a catastrophic failure and the Bitcoin network would continue functioning as intended.
By design, Bitcoin itself is difficult to change but anyone can freely build and innovate atop the network. So while its intentionally challenging and tedious to make changes to the Bitcoin protocol itself, the pace and range of innovation up the stack will be considerably faster and more expansive.
The rough analogy here is that making changes to a jet engine mid-flight necessitates extreme caution — but there’s little risk in designing a new in-flight entertainment system. Indeed, once a base-level of flight safety is assured, an improved in-flight experience that’s more comfortable with better entertainment and fresh food increases the appeal of flying.
Similarly, as people get more comfortable with Bitcoin itself, augmented functionality up the stack will drive broader adoption.
Ultimately, as Bitcoin charges ahead, it offers fertile ground for vertical growth. As industry venture investors, we look forward to the next decade of investing in the infrastructure, applications and services that enable people to unlock the power of natively digital programmable money.
Special thanks to Derek Hsue and Aleks Larsen for reviewing and offering suggestions — h/t to Brad Stephens for the ghost city analogy 🙂
*“slow” here is relative to the pace of innovation that many have become accustomed to in software. In reality, given the stakes, Bitcoin’s development has been far from slow.