Last week, a programmer by the name of Stephen Diehl posted a blog that he wrote on twitter titled, The Token Disconnect. I have linked the entire blog there for you incase you want to read it but in the post Stephen takes a pretty firm stance on what he perceives as a disconnect between that largely public perception of cryptocurrencies. This week I wanted to step back and take a look at a few of his takes and try and provide some thoughts as the article garnered a lot of discussion on twitter about the state of the industry. I run both a traditional "web2" startup and also am in the process of launching a blockchain based "web3" venture and I am often examining just this dynamic, what is all this technology and what is it really for?
To the overwhelming majority of us in the software engineering profession who live closest to the metal, we see blockchain as a technology that barely works and whose use cases (if any) are vanishingly small and niche. Blockchains are a solution in search of a problem, but in the meantime we’re expected to pre-invest in “tokens” while the decades roll by with seemingly no progress on the fundamental question of “For what?”.
The first cohort of individuals that he examines the crypto world through is the people who either built it or will have to take this technology and build things with it. As someone who is more of a business and operational founder I have really pushed myself over the last 2 years to develop my technical understanding so that I can better engage in technical discussions such as this. From a purely technical perspective, as things stand today, he is right. Blockchain infrastructure is a solution looking for a problem though I do have a counter-argument for Stephen on this.
From a purely technical perspective there is no problem. AWS can do everything that Ethereum can do and quite frankly you can do it with better performance and security if you set things up the right way which AWS makes pretty easy these days. With tools like EC2 instances and S3 buckets engineers can standup and deploy scalable and secure apps in days and things just work, it doesn't require an entire network of computers and complex cryptographic algorithms for it to process just a single transaction.
One thing that I think hemight have been missed here is less of a technological question and more of a perception one. Big tech has garnered a pretty bad rap over the last decade for building massive systems that gather massive amounts of consumer data and then garner obscene profits by owning information about all of us. Blockchain addresses this, blockchain system are built on the premise that users of a system own their own assets and that platforms that create these networks derive their revenue streams by maintaining the network, verifying transactions and ownership status, and providing security, not profiting from people's information.
Blockchain isn't actually trying to solve a computer science issue, it is solving a value alignment issue. Blockchain based platforms or dApps (distributed apps) are being built to allow users to own their digital footprint and then better control it. Instead of profiting from that digital trail, our job as a blockchain platform is to create a safe and secure environment for individuals and business to maintain that digital footprint and in that way our values are better aligned, "traditional" centralized platforms are incentivized to gather more and more data and that dogma has broken the trust of the public.
If there is any innovation in crypto assets it’s not in software engineering, but in financial engineering. We’ve created a new financial product like an option contract on a startup potentially building something real, but in case they don’t you can always exercise it early by simply dumping the stock on the public to cash out...
The next cohort that the article talks about is investors and venture capitalists. Stephen takes a pretty harsh approach to how venture investors are using this new technology which you can see in the excerpt above that I have pulled out.
Again, he makes a perfectly fair point and from what I have seen with many tokens there is plenty of validity to this statement and as one person with institutional knowledge of how investors are viewing tokens and crypto projects right now to me, "it's the Wild West". But as you probably all have come to know from me I want to present a counter argument. While I certainly agree that "tokens" are simply a substitute for a share or equity in a company and should be treated (regulated) as such. But financial engineering has always be part of accelerating innovation and providing greater access to capital for builders and entrepreneurs. The easier we make it for money to flow the easier it is for good ideas and good people to fund their projects which provides jobs and can create immense shareholder value (remember that a large portion of VC dollars come from pensions and other pool of capital funded by people putting money away for growth and eventually retirement). Take a look at Y Combinator, one of the most notable incubation programs in the world.
They have largely been credited with pioneering the SAFE (Simple Agreement For Future Equity) which is really just an "engineered" version of a Convertible Note. But what Y combinator realized was that optionality in a generic convertible notes was still too complex for companies at the earliest stages, often pre-revenue or pre-product. The SAFE was engineered as a quick way for angels and other early-stage investors to easily deploy capital into the earliest stage of companies and look what it has done. Y-Combinator has given birth to 25 unicorns. Financial engineering drives efficient markets and efficient markets better support innovation.
What I do agree with Stephen is that often this industry does feel like mania with motives mostly driven by the price of a token versus rallying around innovative new technology. Sure blockchain technology today might not run efficiently enough to replace traditional centralized systems but wireless phone and internet technologies started off painfully slow and wireless technology didn't solve a CS problem, it solves a convenience and business model one.
While I do firmly believe this is the same case with blockchain and crypto technologies we are simply so early and so unregulated that it is actually hurting more than it is helping the industry. It makes me think about this tweet from Patrick Collison, Founder of Stripe, on blockchain and token technology.
While the industry may remain disconnected today, there will be a day when there are clearer rules for how tokens can operate and it will force the companies that use them to focus on delivering value to compensate for the resources it will costs to develop systems within the rules. Consumer protection laws are costly to follow but they also ensure that those hoping to deliver a product or service to consumers do so in a way that actually does deliver "normal" intrinsic value and will payback the investment they made.
The juice will have to be worth the squeeze for lack of a better term. Right now there is no squeeze at all.