“And that is my recommended path to enormous riches!”
I realised that Vinay had stopped talking. It was still early on a Friday morning at one of our weekly Tuttle conversations and there was just me, Vinay and some young chap of indeterminate origin, but smelling of Ivy League MBA and inadequately dressed for late spring in London. The poor fellow had just been “Gupta’d”. I apologised for not paying full attention and asked where exactly these enormous riches were coming from, in a nutshell.
“The recipe is simple: invest in any startups that are doing something that crosses over at least two of the following emerging technologies: weak artificial intelligence; virtual or augmented reality; drones and robots; and block chain. If you can find people using three of the four, even better! If you find people putting all four together, run and hide, they’re building Skynet.”
We all laughed together and sent MBA boy off to buy another round of Americanos.
I understood what all the others were, but block chain?
Despite fancying myself as an early tech adopter and generally inhabiting what seems to most people to be “somewhere in the near future”, I hadn’t paid any real attention to cryptocurrencies or block chains until that conversation, earlier this year. Most people I know pull the same face when I start talking to them about it. Nobody gets it. Everyone’s had a look and pulled back.
At first glance, it seems just too difficult to understand; all the explanations are tech-heavy and aimed at real nerds, the sorts of nerds who don’t look very friendly or open to being asked newbie questions. And it just doesn’t seem to be of any value to me right now - I don’t see anyone on the high street or even in any of my social feeds eager to receive my bitcoin in exchange for their goods or services. The only person I saw who’d tried busking for bitcoin was being mercilessly trolled for it.
There is no Bank of Bitcoin because we are all the Bank of Bitcoin.
Nevertheless, in the last three years, bitcoin and its swarm of sibling alt-coins have established a form of programmable money that is as anonymous and trustworthy as cash, with a record that is permanent and transparent to all, but without the need for any central authority - there is no “Bank of Bitcoin” because we are all the Bank of Bitcoin.
And while all that was going on, a bunch of the geeks who grokked it early on have been working on the next level of abstraction. What does that mean? Well, put very simply, cryptocurrencies let you record the transfer of (digital) cash. That record can represent a sale or exchange of value. And you can look at that as the fulfilment of a contract.
A contract of sale says, at its simplest: “You and I agree that when you give me some money, I’ll give you something else.”
You can build all sorts of complicated “party of the first part” blether on top to protect you from all the things that could go wrong, but that’s all it is: an agreement to transfer ownership of something in exchange for some monetary consideration.
The new platforms such as Ethereum (or the gradually improving APIs for existing block chains) give us a way of recording more complicated contracts and complex sets of interacting contracts and storing both the definitions and the implementation on a block chain.
So, if you can agree that any organisation boils down to a set of contracts, and contracts are things that get defined, agreed on and enacted in software, you can see that when we now have the ability to create organisations entirely made of code.
Such a set of smart contracts form what has become known as a decentralised autonomous organisation and the first big example of such a beast is the prediction market known as Augur. If you screw up your eyes and squint at it, it looks like a financial services organisation in the same way that back in 2004 a podcast looked like a radio station. Which is to say that for most people other than the die-hard fanatic who sees through first appearances, it doesn’t.
It looks like a gambling site. And since the software is still an alpha release, it’s not even a very impressive gambling site, you can’t do anything real with it yet at all, but you can play around with the basic functionality. It allows you either to ask a question that has a yes or no answer, will be easily verifiable and has an end date or, once the end date has passed to verify the answer. For example, someone’s bound to ask “Will Donald Trump win the GOP nomination?” Then people buy shares in the outcome, which we’ll know early in December and at that point the shares will pay out according to whichever way it goes.
It won’t be long before these funny-money cryptocurrency schemes are seen as replacements for traditional centralised markets.
What’s different about Augur, compared to a gambling site or other market, is that although there’s a company behind it, once the software is stable and running (sometime in early 2016), it could step away and disown it. There will be no central servers, just the network of users running the software on their computers over the internet (some of whom will be buying and selling shares, some will be just helping it run and verifying outcomes).
You and I might see it as a fun gambling site, but what if you ask a question like, “Will the price of orange juice be greater than $1.42 in April?” I am not a commodities trader but I can see that this means that simple futures trading can be done without any regulation. Remember the final scene of Trading Places?
This is just the beginning. Just as most people would nod today and agree that a podcast is just like a radio station, it won’t be long before these funny-money cryptocurrency schemes are seen as replacements for traditional centralised markets.
Why? Firstly because they’re more trustworthy - every transaction is open and transparent and cryptographically validated (that basically means it’s so hard to mess around with and alter a record, that it can’t make economic sense to do so) and most importantly of all, it’s all enacted in software. There are no people involved as intermediaries, the participants in the market own and run the market and once they’ve been set up, they’ll just keep running forever. You just need to define what contracts together form the definition of a market or your business.
The City went through a big round of deregulation and introduced electronic trading in 1986, what we called at the time “Big Bang”. In the 30 years since then, the markets have become 24-hour global interactions with many trades made by algorithms even if strategic decisions are still the domain of people. But if you go and stand in Liverpool Street Station, you’ll see swarms of people who look like they still work in banking, investment or insurance. Why are there still so many people there now? They can’t all be making high-level strategy. I spoke to a few to find out, although I couldn’t find anyone who wanted to be directly quoted. “Oh,” they say, “there’s only so much that computers can do.” Or, “at the end of the day, people still buy from people.” Also, “If you actually knew what the IT at our place is like, you wouldn’t be worried about the computers taking over any time soon.”
It really doesn’t feel all that different from when I worked in the marketing department of a pension fund manager in the early 1990s and the guy who sat opposite me basically spent his mornings setting up long lunches with prospective clients and spent his (admittedly quite short) afternoons trying not to look too squiffy while he wrote up his notes on the sale he’d just agreed.
The technical people in banks seem to get it. And they’re working hard to try to carve out a continued place for their institutions in the newly decentralised world. UBS just launched a Future of Finance Challenge encouraging people in the financial technology startup scene to “come up with ideas”. But it feels much more likely that someone clever in that scene will take a sliver of their business and automate it so as to remove any need for pesky humans while distributing profits to the participants in the new system.
The technical people in banks are working hard to try to carve out a continued place for their institutions in the newly decentralised world.
Livio Hughes of the digital transformation consultancy Post*Shift affirmed on their blog a few months ago that real innovation in the space will be more than just an add-on to existing models: “The London financial technology (FinTech) sector is one area where startups are demonstrably generating new ideas, new IP and new business models, which are posing a seriously disruptive challenge to many established financial services (FinServ) companies.”
After wandering around the City for a bit, I went to talk with Vinay again, who, since our earlier chat, had been responsible for coordinating the first stable release of Ethereum and I asked him when he thought this wave of transformation might break. “It’s really hard to say, but what you’ve got is a wavefront of technology coming up against the desire of a social class to retain jobs. Look for the places where people are fighting against the inevitable and see how much fight they have left in them.”
That’s clear enough to see in another area where long-term dominance of human knowledge is being undermined by mobile apps and GPS - the London licensed taxi trade versus players like Uber. The taxi drivers still have quite some fight in them. The closest we have to that wave hitting the City at the moment seems to be Augur and for most people that sort of thing is just this dull rumble in the distance.
I think that It’s as difficult now to imagine what it will be like as it was 20 years ago to imagine what journalism would be like once the world wide web had chewed it up, swallowed and regurgitated it as a mix of the same old institutions and brand new players doing something completely different.
With hindsight, we can see that the disruption and disintermediation that the web brought us was an inevitable wave, but the 300,000 people who commute into the UK’s financial centre every day seem mostly oblivious or confident that the wave won’t hit until they’re safely in retirement. I’ve met a few brave Canutes heading out to marshal the waves to do their bidding, but my bets are all on the smart kids in their bedrooms working out how to make money out of my conviction that Donald Trump can’t possibly get the Republican nomination or that a pound of frozen orange juice concentrate has got to be worth more than $1.42 by April.