Reid Hoffman on the Future of the Bitcoin Ecosystem
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Reid Hoffman on the Future of the Bitcoin Ecosystem

Blockstream

Reprint: “The Future of the Bitcoin Ecosystem and ‘Trustless Trust’ – Why I Invested in Blockstream,” by Reid Hoffman, LinkedIn’s Pulse November 17, 2014.

Bitcoin is often characterized in the media as a volatile virtual commodity that can optimize speculation even more efficiently than gold, securitized subprime mortgages, or tulips. That’s not how I think about it. For me, Bitcoin is a transformative addition to Internet communication protocols that will create new networks of trust, fuel massive economic ecosystems, and create enduring long-term value.

Beyond arguments over whether Bitcoin functions more like a commodity or a currency is the fact that it introduces the blockchain, a distributed ledger that resides on tens of thousands of servers around the world. Every time one party exchanges some amount of bitcoins with another party, this transaction is checked against this public and permanent record of every Bitcoin exchange that has ever happened.

The blockchain creates the possibility of trustless trust. Parties no longer need to know or trust each other to participate in exchanges of value with absolute assurance and no intermediaries. So the blockchain greatly reduces the need for third-party payments processors and the fees they charge. It eliminates the possibility of credit card fraud. It creates new possibilities for micro-payments. (You can send someone a fraction of a bitcoin, with transaction fees so disruptively low, that the Wall Street Journal or New York Times could effectively charge a penny to read a single article. AMC could charge a quarter to watch the latest episode of The Walking Dead commercial-free.) The blockchain makes all kinds of cross-border commerce easier, especially when it involves places where there aren’t credit card networks or robust banking systems.

The blockchain protocol doesn’t just enable the trustless exchange of bitcoins. It enables the trustless exchange of any kind of digital asset – domain name signatures, digital contracts, digital titles to physical assets like cars and houses. It’s also possible to attach various conditions and potential actions to digital assets stored in the blockchain – i.e. Bitcoin is ultimately a programmable currency. It can be used to create automatically executable wills. It can automate dividend distributions and escrow and notary services.

All in all, the idea of the blockchain, and the kinds of transactions it enables, is a foundational addition to the Internet that has the potential to massively expand the ways we interact with each other.

What’s even more remarkable about Bitcoin and the trustless trust architecture it introduces is that it’s open source, a technology that no one company controls to its advantage, a public good. This characteristic is foundational to Bitcoin’s value and success to date. But it also means that advances to Bitcoin Core, the software at the heart of the system, happen slowly. Volunteer developers work on the project on their own time. Changes are only implemented when consensus amongst Bitcoin’s development community is achieved.

Currently, the hundreds of millions of dollars of venture capital that are being invested in Bitcoin companies go toward top-layer products and services, like Bitcoin wallets and Bitcoin exchanges. These products and services are extremely valuable, making it easy for individuals users to obtain and use bitcoins – and because they’re attracting so much investment, they’re improving rapidly.

To match this pace, Bitcoin Core needs investment and innovation, too. Right now, however, we’re mostly seeing developers with innovative ideas that could potentially broaden the core functionality of Bitcoin create their own forked cryptocurrencies. These alt.coins are inspired by Bitcoin’s approaches and code, but they operate independently from one another.

While these alt.coins create interesting new possibilities, Bitcoin is the platform where users, merchants, and entrepreneurs are congregating. It’s where the momentum is. That’s why it’s so important to promote development efforts that increase the power and flexibility of Bitcoin Core, and to do so in a way that keeps Bitcoin open, accessible to all users and developers, a public good.

In pursuit of this public good, I have personally invested in a start-up called Blockstream. After extensive discussion with my partners at Greylock, we decided this approach was the best way to achieve our long-term goals for the project. In this instance, the first objective is to increase the public good by strengthening the overall openness and functionality of the Bitcoin ecosystem through “sidechains” technology. Delivering returns to investors is an objective as well – but it’s a secondary objective.

Blockstream’s founders include Austin Hill and Adam Back. I first met Austin in the late 1990s, when he was CEO of Zero-Knowledge Systems, a pioneer Internet privacy company. Adam is the developer of HashCash, which Bitcoin creator Satoshi Nakamoto relied upon for generating and verifying currency in the Bitcoin system. Together, they have decades of experience in the domains of cryptography, trust, and identity, all of which they are drawing upon in this new endeavor.

Blockstream plans to extend the capabilities of Bitcoin through sidechains technology. Right now, when developers want to add some major new feature or characteristic to Bitcoin, like stronger anonymity, there are two approaches: Develop the software and hope Bitcoin’s core development team adopts it, or create an entirely new alt.coin. The alt.coin approach expedites innovation. But it also fails to capitalize on – and potentially subverts – the network effects that arise as developers, entrepreneurs, merchants, customers, and peer-to-peer nodes (aka the servers that house a cryptocurrency’s blockchain) aggregate on a common platform like Bitcoin.

Sidechains allow developers to add features and functionality to the Bitcoin universe without actually modifying the Bitcoin Core code, through a process called “two-way pegging.” Consequently, innovation can occur faster, in more flexible and distributed ways, without losing the synergies of a common platform with a single currency.

Implementing sidechains will require changes to Bitcoin Core, however. It won’t happen unless the Bitcoin core development team, and more broadly, the larger Bitcoin community, believes that the changes improve Bitcoin’s overall utility and status as an open, decentralized public good.

And that’s why I’m participating in this first-round financing as an individual investor, and why Blockstream itself will function similarly to the Mozilla Corporation. Here, our first interest is maintaining and enhancing Bitcoin’s strong open ecosystem. And the structure we’ve chosen will give us the freedom and flexibility to prioritize public good over returns to investors.

Over time, I believe this ecosystem-first approach will ultimately create massive economic value – for everyone in the Bitcoin universe, including individual users, businesses of all types, developers, entrepreneurs, and investors. To fully capitalize on the architecture of trustless trust that Bitcoin enables, many new companies, products, and services are needed. A few months ago, for example, I led Greylock’s investment in Xapo, a Bitcoin wallet.

As Bitcoin evolves, Blockstream will play a huge role in helping it maintain its momentum, by making it easy to add new capabilities to the platform. And Blockstream’s success will in turn generate new waves of technical and entrepreneurial innovation. It will help make Bitcoin the kind of open, highly adaptive platform upon which a vast array of complementary products and services can be built.

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