Blockchain Startups Bitcoin and Ethereum as the Frontier of Finance - King, Stefan

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This book argues that cryptocurrencies like Bitcoin and Ethereum enable entrepreneurs to disrupt and compete with traditional banks. It explores how blockchain technology empowers people to build decentralized financial services and applications.

Banks currently dominate the financial sector due to their control over fiat money and slow pace of innovation. However, cryptocurrencies allow software developers to create new ways of providing services like payments, contracts, and lending outside the traditional banking system. This threatens banks’ oligopolistic power.

The book aims to inform entrepreneurs about opportunities in this emerging field. It discusses how disruptive startups can offer superior products and user experiences compared to legacy players. Several ongoing problems with the current system are outlined, such as high fees, centralization of power, and lack of financial inclusion. Cryptocurrencies may help solve these issues.

While cryptocurrency adoption is still niche, the author argues the technology ultimately has potential to replace many current banking and financial functions. Startups that understand how to apply it could disrupt established industries and carve out profitable ventures. The book explores areas like international payments, tokenized assets, wallet design, and liquidity that entrepreneurs might target.

• Bitcoin and other cryptocurrencies represent a disruption to traditional banking and money systems by allowing for uncensorable digital asset transfers without centralized control.

• Blockchain startups have an opportunity to innovate by building products and services on established blockchains like Bitcoin and Ethereum, which provide a reliable network for transactions.

• These new types of blockchain-enabled financial services have the potential to be superior to traditional bank offerings through features like instant global payments and smart contracts.

• However, cryptocurrencies are still niche and not widely adopted or understood by the mainstream. Prices are volatile as the market deals with hype cycles and news.

• Early innovators who can see through the confusion have a chance to seize opportunities, but blockchain products are not automatically better - they must prove their value proposition.

• The book aims to provide a map for entrepreneurs to navigate this new frontier and stake out territories of freedom and financial innovation using disruptive blockchain technologies.

• Blockchain is a publicly accessible, distributed ledger that records every transaction that has occurred on a cryptocurrency network in a verifiable and permanent way. There is no single centralized database.

• Bitcoin and Ethereum both enable decentralized transfer of value but have different design choices. Bitcoin prioritizes security and reliability for payments, while Ethereum aims to enable decentralized applications with more flexibility and higher risk.

• Cryptocurrencies solve the problem of centralized control over transactions by empowering users through liberation from third party regulation or control. Digital value transfer without intermediaries represents a new class of financial transaction enabled by these technologies.

• Historically, money took physical forms like gold that required costly transportation, creating a role for bankers and other intermediaries in value transfer. Blockchains allow digital value transfer without such third parties through distributed ledger technology.

• Bankers created new forms of money like letters of credit and bills of exchange to facilitate trade and investment in a more convenient way than physical gold or commodity money.

• Money can take different forms based on its physicality and origin, including physical commodity money, paper money issued by private banks or governments, fiat paper money issued by central banks, local fiat currencies, and different types of digital currencies.

• Cryptocurrencies like Bitcoin introduced a new form of digital, distributed money that does not require trust in a central authority like a bank or government. It uses cryptography and distributed ledger technology to achieve consensus in a decentralized network.

• Previous attempts at private digital currencies like e-gold failed because governments banned them, showing the need for censorship-resistant money. Bitcoin solved this by making the network immune to shutdown through decentralization.

• Cryptocurrencies like Bitcoin can function as money globally without needing trusted third parties to facilitate transactions, giving people more choice beyond national fiat currencies and banks. Their decentralized, distributed nature makes them difficult for any entity to censor or stop.

Here is a summary of the key points about the politics of money from the passage:

• Cryptocurrencies like Bitcoin challenge governments’ monopoly on currency and money creation. They allow political minorities like anarchists and libertarians to exit the fiat monetary system.

• Bitcoin has important qualities like scarcity, ease of use, predictable supply, freedom, and resistance to censorship that make it a viable alternative to government-issued fiat currencies.

• Governments benefit indirectly from cryptocurrencies if they become large enough that central banks invest in them. The first to do this gains an advantage.

• Cryptocurrencies create a new, competitive financial system without government or bank involvement. This threatens the status quo monetary powers of governments.

• There is a political/ideological debate between those who think governments should control money and those who support decentralized cryptocurrencies outside government control.

• Most governments have not yet tried to stop Bitcoin because they don’t fully understand it or want to avoid empowering opposition groups. But some politicians now see it as undermining national interests like the US dollar.

• Cryptocurrencies open the door for political minorities to exit the mainstream financial system in a way that was not previously possible. This shifts the balance of power over time if adoption grows.

• Cryptocurrencies like Bitcoin have the potential to disrupt the traditional financial system by allowing for decentralized, digital money and new types of financial services and contracts built on top. This challenges the power and control of banks, regulators, and nation-states over money and finance.

• Starting a successful crypto business means replacing the status quo and taking market share and power away from established financial institutions. This will face political resistance as money is tied to nation-state politics.

• Blockchains can function as virtual jurisdictions without geographic boundaries that are difficult for regulators to control. This provides new opportunities for financial innovation but also tensions with the existing order.

• Crypto entrepreneurs will need to understand politics and power dynamics to navigate potential pushback from those threatened by disruption. While entrepreneurs typically avoid politics, engaging with political issues may be necessary for success in this space given money’s political nature.

• Sovereign entities like North Korea and Iran already use crypto for political ends, so others may be able to as well through building businesses in this arena. Overall it frames cryptocurrencies as having significant potential for both financial disruption and political impact.

Cryptocurrencies like Bitcoin and Ethereum are creating decentralized virtual jurisdictions that compete with nation-states’ control over money and finance. As these virtual currencies gain more functionality, entrepreneurs operating within their networks have to navigate interactions with regulators like nation-states did historically with the separation of church and state.

Ordinary people can view themselves as sovereigns within these decentralized networks by using cryptocurrencies to conduct private financial transactions freely. However, this freedom comes with risks, as seen by early experiences like Silk Road getting shut down due to attracting too much attention from regulators.

Entrepreneurs have to carefully consider how visible they want to be - operating openly risks more regulation, while staying small below the radar allows more freedom but comes with its own risks. Security is also important, as smaller blockchains are vulnerable to hacks if they don’t have strong mining networks like Bitcoin. Overall, cryptocurrencies are creating new virtual spaces for conducting financial activities with less centralized control, but this territory of freedom comes with navigating political realities.

• Liquidity and adoption of cryptocurrencies are growing as the overall crypto ecosystem matures in size and complexity. Trading volume and number of company relationships are increasing.

• Three main factors limit growth of crypto markets: on-ramps/off-ramps to fiat currency (regulation issues), usability of trading/transacting, and liquidity between buyers and sellers.

• Entrepreneurs can help address these friction points by complying with or innovating past regulations, automating/simplifying user experiences, and connecting buyers and sellers to boost asset liquidity.

• The crypto market is still in early stages but growing similarly to how internet markets developed over decades - starting niche but ultimately matching and exceeding traditional finance in sophistication.

• There are significant entrepreneurial opportunities remaining as the 2020s are seen as a potential boom time, whenever user frustration or inefficiency is observed in the current systems. Solving problems and delivering solutions to a growing customer base is the goal.

In summary, it discusses the evolving maturity and liquidity of cryptocurrency markets, identifies the key factors currently limiting full growth, and frames entrepreneurial opportunities remaining as the ecosystem continues to develop over the coming decades.

Insiders in the crypto space frequently discuss topics related to usability, scalability, privacy, interoperability, regulation, and new applications of blockchain technology. These issues present challenges for crypto adoption.

Some ideas being explored include making transactions easier, increasing transaction capacity, enabling private transactions, allowing data exchange between blockchains, navigating regulation, and applying blockchain beyond finance. Solving such problems could help startups gain market share from traditional banks.

Currently, mainstream adoption is limited as crypto is not widely used for investments, e-commerce, or retail payments. The industry seems to be in the early stages of three stages - first as a store of value like gold, then as a medium of exchange for payments, and finally as a unit of account where prices are denominated in crypto.

Connecting isolated circles of crypto buyers and sellers through exchanges is important for liquidity and demand. Stablecoins and services that facilitate conversions between fiat and crypto also help address friction. Finding better ways to facilitate rebalancing of portfolio holdings between fiat and crypto assets could help the industry mature.

As most economic ecosystems will increasingly use crypto-assets rather than fiat currencies, exchanges will earn smaller margins. Liquidity across the crypto space needs to be boosted by getting more customers and merchants to make and accept payments in cryptocurrencies, which will help drive broader adoption. A crypto-asset can only function as currency when a large number of people agree it has value. Bitcoin currently dominates due to strong network effects, but other cryptocurrencies can carve out niches by addressing technical limitations of Bitcoin or preferences for different features. Companies and individuals have various financial motivations for earning, saving, investing, speculating in, and spending cryptoassets, such as location-independent payments, attracting crypto users, tax planning, and private or uncensored transactions.

• Cryptocurrencies allow for tax avoidance by obscuring the identity of those involved in transactions for as long as possible. While tax avoidance is not condoned, some use cryptocurrencies as part of their tax planning strategies.

• In low-trust societies and industries like online commerce, gambling and pornography, cryptocurrencies enable payments that cannot be reversed by buyers or third parties like credit cards. This allows for e-commerce that would otherwise not be possible.

• Saving, investing and speculating are major uses of cryptocurrencies. Savers use them to store value more securely than traditional banks. Investors see opportunities for ownership of tokenized assets. Speculation drives cryptocurrency prices based on expectations of their future utility and benefits.

• Several “buyer personas” are early adopters interested in cryptocurrencies, including playful developers experimenting with new technologies, libertarian ideologues seeking censorship resistance, risk-tolerant traders and speculators, activists focused on social impact, and members of underground economies needing censorship-resistant payments. Entrepreneurs building cryptocurrency products aim to engage these early adopter groups.

• Blockchain transactions can be described as “layers in a glacier” to emphasize their immutability once added to the chain.

• Some professional Ethereum developers focus deeply on technical details but may lack broader context of how cryptocurrencies relate to the origins and evolution of money. Specialization has opportunity costs.

• Playful developers are drawn to blockchain technology due to its new possibilities for building systems and tools. As early adopters, they may become customers of other types of crypto enthusiasts.

• Adventurous entrepreneurs see opportunities to disrupt incumbent industries and systems using blockchain. They require vision, leadership and passion to rally a team around new ideas. Choosing the right disruption potential of a project is key.

• Activists, anarchists and libertarians pursue individual liberty and see crypto as a tool against unjust power structures. They aim to create private and censorship-resistant tools and identities.

• Traders aim to profit from market movements over different timeframes: arbitrageurs, day traders, position traders, and long-term “HODLers.” They require skills, experience and information advantages over other market players.

• Industry service providers have an important role in building, educating and providing tools/infrastructure for the growing blockchain space.

• Cryptocurrencies are still early in their development and adoption, with user experiences that can be confusing and opaque.

• Marketers, designers, and educators are starting to offer services to crypto startups to help improve user experiences and grow adoption. These service providers see opportunity in a growing industry.

• While riskier due to a smaller client base and immaturity, service providers can establish an early foothold before widespread adoption. The entrance of these supporting services suggests innovators are connecting with early adopters.

• Crypto assets that fulfill specific financial functions like transacting, saving, or investing can catalyze network effects, driving liquidity, price rises, and absorbing more transactions as the network grows in a feedback loop.

• Successful assets provide clear financial benefits and choices for users, and have low transaction friction through fast and easy user experiences. Later efficiency improvements can make the experience even better once the asset is established.

• Technologies like payment channels and smart contracts on secondary layers can improve transaction speeds and costs compared to settling every transaction directly on the main blockchain. This helps “free” digital money similarly to how the internet freed information.

Here are some key points about who might want to use fully digital money and under what circumstances:

• People in developing nations whose financial systems have been corrupted may be ready to switch to cryptocurrencies for a more trustworthy currency.

• Developed countries have more trust in their monetary authorities and national fiat currencies, so citizens are less motivated to adopt cryptocurrency.

• Stable liberal democracies may adopt cryptocurrency when it becomes as convenient as digital information - invisible to others besides the transacting parties, able to move freely like data but maintained through secure distributed ledger technology.

• Widespread adoption will depend on cryptocurrency payments becoming even more comfortable and faster than existing options like cash, checks, credit cards. It will need to serve as sound, digital money that can stream anywhere instantly.

• Entrepreneurs and developers will drive new types of digital payment applications that improve convenience over current systems and help mainstream adoption of ideal digital money. But fully envisioning new financial services is difficult at this early stage.

So in summary, unbanked populations and circumstances where traditional currencies are untrusted drive early adoption, while widespread use in developed nations will require cryptocurrency achieving even greater ease and speed than existing digital payment methods.

• As technologies improve, the costs of reproducing and sharing digital content approach zero. This makes traditional business models of charging for each copy unsustainable.

• New business models focus on charging for conveniences, curation, membership experiences and lifestyle brands rather than directly for the content itself. Examples include Netflix, Amazon subscriptions, Mindvalley and Masterclass.

• Cryptocurrencies and technologies like the Lightning Network allow for micropayments that were not practical before. This enables new types of reciprocal and ongoing revenue models between creators and audiences.

• Ideal digital money systems could allow people to automatically “pay tribute” to teachers, creators and brands that provide ongoing value in their lives. This could replace traditional education and credentialing systems.

• For payments to become truly ubiquitous, user experiences like crypto wallets need continued improvements to reduce friction and complexities, making cryptocurrencies as easy to use as traditional money for mainstream audiences.

• Ongoing development focuses on hiding technical complexities “under the hood” to deliver pure functionality and intuitive experiences to users, similar to how technologies like the internet and smartphones have evolved.

So in summary, it discusses how digital technologies are changing business models away from direct content sales, and how cryptocurrencies could further enable new reciprocal and ongoing value exchange models if user experiences like wallets continue to improve.

Blockchain wallet design is a vast design space that will take years to fully explore and develop good solutions. The risks of holding private keys that control crypto assets present unique challenges. Early wallet designs faced a tradeoff between convenience and security - exchanges were easy to use but risky, while hardware wallets offered better security but less convenience.

Nature provides some examples of how to securely store valuable assets, like animals hiding food caches or memorizing locations. Over time, wallets have improved by increasing security without losing as much convenience. Hardware wallets emerged as a better balance than online or mobile wallets. Multi-signature and offline backup wallets provide even higher security. Custodial cold storage wallets offer the greatest security currently by outsourcing key management, but at the cost of freedom.

Ongoing innovation will further improve this tradeoff, just as mobile phones evolved into more powerful and user-friendly smartphones. Wallet design requires understanding risks like theft and addressing user needs around security, convenience and control. The goal is to make safe crypto asset management accessible to mainstream non-technical users.

• Manufacturing refers to the physical production process needed to create hardware wallets.

• Software security involves writing code that protects users and prevents hackers from accessing funds. This includes threat models that analyze potential attack vectors.

• Mental models refer to how people conceptualize and interact with technology. Good interface design is needed for an intuitive user experience.

• A competitive crypto wallet company needs expertise across these fields - manufacturing, security, UX design. It’s a challenging multi-disciplinary effort.

• As a customer who pre-paid for a hardware wallet, the author is still waiting for delivery after development delays.

• Building a successful crypto wallet is difficult. Firms that do it right can be rewarded, but there are also significant risks if security flaws emerge.

• The author is hopeful the company will complete the project to bring a cutting-edge product to market, but acknowledges success in this space is hard-won.

The main points are that developing a secure crypto wallet requires integrating diverse technical and design skills, successful execution is difficult leading to potential delays, and doing it right versus wrong carries high stakes given the importance of protecting users’ funds. The author has personally experienced a crowdfunded project stall and expresses cautious optimism it will deliver.

• Ethereum has been a successful platform for launching new crypto-assets due to its large existing user base and ecosystem. This network effect is difficult for other blockchains to overcome.

• Alternatives to proof-of-work, like proof-of-stake, introduce governance which can centralize decision-making. Governance is seen as compromising decentralization and immutability, which are valued in Bitcoin.

• Ethereum is still growing due its success in attracting projects and developers through its token economy. However, some see it as more centralized than Bitcoin and question its long-term security.

• Tokenized fundraising allows global crowdfunding without intermediaries. But it also enables scams if not regulated properly. Regulations may develop over time as retail investors participate more.

• Tokens can fund organizations and provide access to networks/platforms, but their value depends on demand for the underlying resources from users. Token economics aim to align the incentives ofdifferent stakeholders.

• Tokens can have four different positions in terms of scarcity and usefulness: highly available but not useful, scarce but not useful, scarce and useful, or highly available and useful.

• Early projects issued tokens slowly and adjusted supply to demand, similar to a central bank. But centralized management goes against the decentralized spirit.

• Projects are experimenting with distributed governance models like DAOs, proof-of-stake, and MakerDAO to balance stakeholder interests without central control.

• Game theory informs the strategic balancing of decision-maker interests to support a decentralized network.

• Non-fungible tokens represent unique digital assets like identities, property titles, collectibles, and tickets.

• CryptoKitties was an early successful use of NFTs for digital collectibles in a game. It demonstrated the potential for tradable in-game items controlled by players.

• Representing in-game items as tokens enables new types of games that reuse existing digital assets. This could drive further network effects across games.

• CryptoKitties proved that people will trade crypto-assets for collectible and entertainment value rather than just financial value. Players enjoyed breeding, collecting, and trading digital cats.

• Other games have since launched with blockchain-based scarce digital assets like rare cards that can be traded. This blends gaming with real-world financial elements.

• BeachHead 2020 is a shooter game being developed that will have a virtual economy with scarce digital goods like weapons, cars, and limited real estate that players can buy using an in-game token.

• Non-fungible tokens in games are one area poised for growth, as is decentralized finance which allows new types of financial instruments and products without traditional third parties like banks.

• These innovations could eventually lead to decentralized autonomous organizations that host global smart contracts and regulations independent of geographical jurisdictions.

• The introduction of this emerging ecosystem was provided and ideas were given for new companies utilizing cryptocurrency and tokenized assets to transform and revolutionize traditional finance.