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Why cryptocurrencies (and ‘blockchain’) will eat the software industry

Marc Andreessen, co-founder of Andreessen Horowitz, published in 2011 the mythical article Why Software is eating the world on how software was penetrating all businesses, transforming all these business models into software companies. In 2011, neither the technology nor the bitcoin price had yet captivated the collective imagination of humans. But since then we have attended at least two major speculative waves of cryptocurrencies (in 2013 and 2017) that have made it possible for Blockchain technology to settle and mature.

Bitcoin and all blockchains are based on open source software and P2P decentralized networks (peer-to-peer), economic thinking and game theory. The combination of these elements – and that is the great genius of Satoshi Nakamoto – has made possible a new playing field that goes far beyond its individual components.

The Internet of Value

The comparison of the Internet of the Information and the Internet of the Value, that we explained in more detail in the book Blockchain: The industrial revolution of Internet, exposes how Blockchain democratizes the investment in protocols.

Most of the value is concentrated in the application layer (created by Google, Facebook, Amazon, etc).

In the Internet of Value, based on the blockchain technology, the bet is that a large part of this value could be moved to the protocol layer. This is because, to date, there was no instrument that would finance the development of open protocols, because normally these protocols are complex, very technical and slow to develop. However, the emergence of blockchain has democratized the investment in open and decentralized protocols by creating tokens that are used as a unit of account in blockchains. These tokens – also known as cryptocurrencies – are revalued in the market to the extent that applications are created that need such cryptocurrencies for their use.

The more applications there are that are valuable to users and that are created on a public blockchain that uses cryptocurrencies, such as bitcoin or ethereum, the higher the demand for them.

If this premise is fulfilled, many of these decentralized applications would generate more value than their centralized counterparts by offering functionality, privacy or any other aspect that the market may value.

Today, cases of use of the Internet of Value are mainly reflected in those countries that are experiencing currency crises and that make use of blockchain to avoid capital controls or the restrictive monetary policies applied in their countries. In Venezuela, one of the countries that is in a situation like the one described, it is estimated that there should be around 10,000 to 15,000 active users of bitcoin and cryptocurrencies according to BitcoinVenezuela.com. Another reference is Argentina, which has one of the most active communities in the blockchain world as a result of continuing monetary collapses, combined with a highly educated and enterprising population.

In both cases, it is likely that one of the key factors for its development has been a collapse of trust in institutions. This same factor is repeated, although with less intensity, also in countries with apparently solid social systems, promoting the search for a world without intermediaries, more optimized, governed by a decentralization of trust.

Why cryptocurrencies and Blockchain eat software?

In the early days of bitcoin and blockchain, many people were passionate about this technology and the possibilities of creating a better world through decentralization. The idea is that decentralization can break with some of the established systems of concentration of power and resources, allowing a more equitable and independent distribution of the same thanks to the use of technology.

The most positive result of blockchain, to date, is the existence of serious projects such as bitcoin, which provide real value in the economy. Projects with the potential to create much more disruption with a global community of developers and followers around the world. A key factor of this new technology and its possibilities has been the economic incentive that has rewarded people who adopted bitcoin early, favoring an incentive structure that has allowed the ecosystem to develop over time. That’s why, beyond that bitcoin is a technical genius, the incentive system to maintain this decentralized system is also a genius. In that sense cryptocurrencies eat the software because they are the main catalyst that has managed to maintain interest over time. Interestingly, Satoshi Nakamoto himself, as reflected in The Book of Satoshi, had predicted the revaluation of bitcoin in 2010, if the expected conditions were met.

Satoshi Nakamoto assumed, like Adam Smith, that people act for their particular benefit, that is, that economic behavior is mainly individualistic. Hence his proposal for a decentralized payment system as a global infrastructure, which uses precisely that search for the particular short-term benefit of humans. And here is the game theory defined by John Forbes Nash to achieve the greatest possible collective value. This is the economic base on which bitcoin is based.

The rules for the decentralized management of bitcoin, which are also used in other public blockchains based on rewards, have allowed an explosion of creativity sustained, however, in the search for short-term profit through the creation of new cryptocurrencies. In many of these cases, they have not brought innovations of interest from a technical point of view, and they are nothing more than digital garbage (this is why they are often known as shitcoins or scamcoins).

This process of creative destruction, with its lights and shadows, allows the cryptocurrencies to eat the software. Human greed is capable of unleashing a multitude of experiments and creations that, in most cases, are technological failures. But, on the other hand, these behaviors are the result of the use of free software procedures that democratize and decentralize this new technology.

Perhaps not even the most fervent supporters of decentralization are satisfied with the intermediate result of this process, which materialized in 2017 with the boom of the ICOs. But neither do the defenders of the Distributed Ledger Technoloy or DLT, who do not have these tools so useful to innovate and attract global communities of developers, supporters and investors.

Blockchain is a gigantic social experiment and we do not know what real reach it will have in a few years. We are perhaps facing something similar in its structure to what the Internet was like in 1992. But this time, instead of producing a sense of threat among different sectors of the traditional economy, I hope it is seen as an opportunity to reinvent the world for the better, accepting the collateral effects that may occur as part of a process where everything that does not come from nature can be changed and questioned. Because the systems created by humans must be at the service of humans, beyond the artificial mental or geographical borders that we have defined among all.

Also published on Medium.

Published inCryptocurrencies

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