Blockchain Connect 2018: Final Thoughts & Looking Forward

“In 5 years if you go into a Starbucks and you try to buy coffee with fiat currency, a barista is going to laugh at you,” said Tim Draper…

“In 5 years if you go into a Starbucks and you try to buy coffee with fiat currency, a barista is going to laugh at you,” said Tim Draper as he virtually welcomed us to the conference. Draper has led investments in companies like Skype, Tesla, and Twitter.

With 1,000+ attendees from around the world, Blockchain Connect 2018 gathered cryptocurrency thought leaders and founders to discuss the scalability and applications of blockchain technology. On behalf of Wolverine Crypto Trading, Naman Gupta and I (Danny Sheridan) had the pleasure of attending.

Quick Takes

  1. Banks, governments, and the cryptocurrency industry (i.e. investors, inventors & companies) need to play nice with each other

  2. In 10 years, the Four (Alphabet, Apple, Amazon & Facebook) are more likely to be the financial institution of choice for Millennials

  3. Incentive structures are hard to get right (such as Proof of Stake)

Hemant Taneja & Elad Gil, “Crypto Needs Banks”

Deep Dives

1. Banks, governments, and the cryptocurrency industry (i.e. investors, inventors & companies) need to play nice with each other

Historically, cryptocurrency evangelists have endorsed anti-bank and anti-government sentiment, given the centralized nature of our current financial and legal systems.

As mainstream popularity of digital assets increases, however, it’s evident that the crypto community, government, and big banks cannot continue to exist in isolation.

Cryptocurrency markets must service a wider range of participants, including individual and institutional investors that have traditionally relied on banking infrastructure to conduct business at scale. Integrating banks’ robust custodial, clearing, settlement, and brokerage services could promote market liquidity and transparency: making digital assets more accessible and secure for everyone.

Contrary to popular perception (given recent global crackdowns and negative price effects), both governments and investors could actually stand to benefit from cryptocurrency regulation. If markets were paired with banks’ infrastructure, it would be easier for the government to set rules and standards for digital assets. Basic oversight can reduce wild speculation, eliminate bad actors that lead people to lose a lot of money, and allow for continued investment in society by fairly taxing capital gains (just like any other investment).

If banks, governments, and the crypto community don’t cooperate on tackling the problems of oversight and scalability, they set themselves up for a future of continuous friction. All three parties are naturally averse to what they don’t understand, and the burden to properly educate the others on how they can prosperously co-exist must be shared.

2. In 10 years the Four (Alphabet, Apple, Amazon & Facebook) are going to be the financial institution of choice for Millennials

Tim Draper opened the Blockchain Connect event by welcoming us in a video. He made the bold statement that “in 5 years if you go into a Starbucks and you try to buy coffee with fiat currency, a barista is going to laugh at you.” Let’s entertain this idea and make a bold statement: Tim’s prediction is accurate. The question we should be asking ourselves is how we will be making cryptocurrency payments. Our answer is “the Four”.

In the Four by Scott Galloway, Galloway deconstructs the strategies of the Four that lurk beneath their shiny veneers and hows how they manipulate the fundamental emotional needs of customers.

Who can move faster: banks or tech companies? From my seat at the show, it is a mouse (banks) versus a snake (the Four). The snake is going to suffocate the mouse and use its carcass to grow bigger. Technology companies are moving faster and more aggressively than ever before.

The home page of Wells Fargo annotated with FinTech firms disintermediating services (by CB Insights)

The graphic above depicts the lack of personal space that banks are getting from tech firms. No longer is there breathing space as the Four aim to try big ideas with the willingness to fail and retreat most of the time. “In the past four years, we have seen one of the fastest periods of change and innovation in financial services,” said David Craig, President, Financial & Risk Division, Thomson Reuters. “Technology is more than ever radically improving customer experience and changing the traditional boundaries of financial services.”

The Four will grow through acquisitions as they enter the financial services market. One of the clearest examples is David Marcus, Head of Facebook Messenger, joining the Coinbase board. Prior to Messenger, David was President of PayPal, where he led the payments company’s global expansion and product strategy.

Millenials are positioned to try the financial service products that the Four create. We think they’re going to like the user experiences, social integration, and lower costs enough to try it. Once users try the FinTech user experiences produced by the Four, they’re never turning back.

3. Incentive structures are hard to get right (such as Proof of Stake)

A theme of Blockchain Connect was the idea of consensus mechanisms — a way of getting strangers to agree on a set of facts.

2017 was the year of Proof of Work

2018 is the year of Proof of Stake

Proof of Work (aka Miners): we should trust miners who invest (i.e. electricity and microchips) to solve mathematical problems with the goal of validating transactions and creating new blocks. Risk: If a Proof of Work miner is dishonest, they both lose the reward and incur the operational costs of solving complex mathematical problems.

Proof of Stake (aka Forgers): we should trust forgers (the creator of new blocks) depending on their wealth, or stake, in a cryptocurrency. For example, you must put $1M worth of Ethereum (approximately 1,000 ETH) into an Escrows smart-contract to become a Forger. (You can withdraw from being a Forger anytime and your $1M worth of ETH would be returned to your wallet.) There are no miners to solve mathematical problems using lots of electricity. Risk: If a Proof of Stake forger is dishonest, they lose part of the cryptocurrency they put in Escrow.

“Proof of stake models are attractive because we, as humans, like incentive systems. Satoshi’s model for bitcoin was 51% altruistic and honest nodes, with 49% Byzantine/adversarial. Proof of stake protocols are more appealing because we understand incentives. It is much more difficult to create incentive structures, working 99% of the time isn’t good enough. The outliers can take down the whole system.” — Yonatan Sompolinsky, Hebrew University PhD candidate of Computer Science

by Naman Gupta & Danny Sheridan

Ross School of Business, Class of 2018 @ The University of Michigan

Acknowledgements

Thank you to Wolverine Crypto Trading for organizing this trip, the Ross School of Business for their support and funding, and SV Insight for sponsoring our tickets.

Additionally, we’d like to highlight a few individual speakers that helped inform our opinions: