Journey to the West: Blockchain in America

Richard and I are just back from a roughly two-week trip to California. Richard wrote earlier about our experiences with the Stanford Blockchain Conference. Rather than rehash his opinions, I thought I’d share some broader thoughts on how Silicon Valley looks to someone from Asia.

ON DEVELOPERS

The average developer we met in the United States was operating at a higher level than in any other community except possibly Singapore. Most projects were being competently executed and people could discuss the technical aspects of their protocols clearly and coherently.

The common approach to solving problems was technical rather than economic. In a protocol meeting on the Ethereum roadmap we attended, developers spent hours hashing out technical solutions to resource exhaustion attacks. No-one observed that the problem could be solved by incentivizing nodes to regulate their peer-to-peer connections. A problem that could be handled on the incentive layer was treated as a whiteboard-style technical challenge. Other problems were addressed similarly.

This tendency may explain why Silicon Valley is biased towards proof-of-stake protocols, which tend towards complicated governance layers that lock off network openness. The top-end developers we met were able to discuss these trade-offs clearly, but seemed to lack an understanding of their underlying causes. The delegation of protocol design to subcommittees is likely exacerbating this problem by forcing developers to treat all problems as self-contained. The resulting bias may be part of why proof-of-work is less popular in the Valley than elsewhere, given POW’s preference to solving some technical issues by incentivizing collusion between miners.

In terms of actual development trends in the industry, most of the excitement we saw on our trip revolved around stablecoins. We did not meet any other projects focused on fixing the underlying incentive problems within proof-of-work and proof-of-stake. Most technical work focused on scripting, sharding and smart contract execution.

INDUSTRY

There is a massive chasm between Asia and the West. The financial services sector in American is visibly slow and uncompetitive. Companies such as Circle and Square and Coinbase appear to believe that they are protected by a regulatory moat and seem focused on fundraising and more fundraising. There is little real-time experimentation of the sort that is common in Asia.

The consumer-focused internet industry is also surprisingly passive. Facebook is known to be active in blockchain although extremely secretive (multiple people told us that the company is developing a stablecoin for integration in mobile services — a move clearly intended to compete with Tencent), but both it and Google were absent from the events we attended.

None of the major companies seemed to be worrying about the emergence of big-data blockchains. One insider explained their lack of focus by pointing out that the sheer volume of data they manage is too large for blockchains to handle. This position fails to appreciate that there is no need for exabytes of data storage on a truly scalable blockchain, and most storage needs are driven by the business model rather than the user experience.

On a closing note, we were surprised by the lack of regard for nChain and CSW in the Valley. Blockstream also occupies a much smaller role in the cryptocurrency industry than it would seem from Asia.

VCS AND ACADEMICS

We didn’t meet a single person at Stanford who viewed blockchain as a PKI network layer. This tunnel vision was echoed at Berkeley, where a panel discussion with five guests did not include a single guest who discussed non-monetary uses of blockchains, an omission that is particularly striking given that one of the panelists was focused on human rights. A major part of the problem appears to be the pervasive assumption in America that Web3 will be built atop smart contracts and virtual machines. Delays in the Ethereum scaling roadmap may be contributing to a sense of non-urgency on this front: the future is vague.

The pre-eminence of Ethereum in Silicon Valley seems to have distracted people from the underlying nature of blockchain in more dangerous ways as well. Among those we met who asked about Saito, only a single person was aware of the free-rider problems that distort spending in POW and POS networks. One investor we chatted with at a bar actually turned ashen when we pointed out that transaction propagation is not incentivized in POW or POS. “Why is no-one else talking about this?” he asked. The lack of focus on economic fundamentals was pervasive and may explain the enthusiasm for complicated governance structures that paper over deeper incentive problems.

Despite the experience Silicon Valley has had watching the intellectual property battles in the telecom space over the last two decades, no-one seems to be paying much attention to intellectual property beyond financial services companies and some industry-focused development powerhouses such as IBM. There is a general belief in the academic and investment communities that blockchain-powered applications will necessarily evolve into open API layers. But what will happen when the courts say no?

CONCLUSIONS

If proof-of-stake is the future and we are heading towards a permissionless open web then the United States is going to define the future. The proof-of-stake implementations that dominate Silicon Valley are more sophisticated than the versions currently being developed in Asia. These networks can be repurposed into private corporate blockchains.

My own reading is that we will have mass on-chain scalability within two years. Assuming this is true Silicon Valley is unprepared for the magnitude of the shift that is coming. American financial service companies will not remain competitive as other avenues emerge for users to sidestep their heavily regulated fiat-crypto channels. Consumer businesses are not ready for an assault on their core advertising models. And there is very little genuine thought leadership on the non-technical aspects of blockchain, which will slow down the adoption of working solutions.

It is a fascinating time to be in the blockchain space.