Part 2 of 4
In this second installment of our four-part series, exclusive to Crypto Daily, I continue to provide you the world premiere of a series of excerpts from my new book, Basic Blockchain, that seeks to answer the question not only what blockchain is, but why it matters to business and society.
If you missed Part 1, you can find it here!
I have just spent the day with my colleagues from Saïd Business School at the University of Oxford, and tonight will be hanging out with over a hundred former students who took our online programme Oxford Blockchain Strategy as we talk about how DLT gets applied to real world problems. It’s an appropriate week to be sharing another look at Basic Blockchain.
“Once more unto the breach, dear friends, once more”
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Adapted from Basic Blockchain © 2020 Visionary Future LLC, published by Robinson, an imprint of Little, Brown Book Group
There’s a patina of rock and roll surrounding the blockchain hype cycle. Industry events resemble rock concerts (Snoop Dogg headlined an industry party), and blockchain players can be found behind velvet ropes in Ibiza and Cannes, or pursuing transcendence in the sands of Burning Man.
The blockchain hype train rides on the twin rails of open-source developer initiatives and investor relations. Open-source developer initiatives are where a company recruits numerous contributors, who mostly don’t work for the company, to provide code improvements for a piece of software. They do this to get access to the code, so the trade-off is that they get software for free in exchange for contributing any improvements they make to the software. Investor relations are how a company maintains stability and interest in the price of its securities, through sharing information about performance and future initiatives. These two ideas come together when blockchain companies start putting the word out about what they are doing and, sometimes, raising money through selling their tokens. It has spiralled into an inescapable freight train of promotion chugging down the track.
All aboard . . .
Perhaps the most legitimate exemplar of where marketing meets blockchain is in the domain of open-source developer initiatives. There isn’t one monolithic standard for blockchain. While bitcoin was the first protocol, many others have since emerged. A protocol, in this context, is a set of rules around how a blockchain network exchanges information, manages transactions and handles governance (decision making). It’s the basic operating system of a given blockchain. Sometimes it has an applications programming interface (API), to make it easier for developers to work with the particular blockchain.
Open-source initiatives publish their code for all to see, and encourage a community of developers to make improvements or extensions to it. Linux, a free operating system, is an example of one widespread open-source project (UK-based Ubuntu, from Canonical, is one of the most popular flavours of Linux). The Android operating system for mobile phones, the most popular in the world, is open-source, although many refinements since are not. The open-source nature of many blockchain instances enables users to have greater trust in the system because they are able to see how blocks are formed, how security is handled, how tokens are transacted and so on.
Open-source initiatives are a clever way to get thousands or millions of developers to build on top of a particular code base, demonstrating the power of ecosystem innovation. Instead of investing significant resources in getting your own people to build a system, enlist the labour of others.
If you’re going to have a vibrant open-source community, you need to dedicate time, energy and expense to community relations. You need to inform developers about what you’re doing, have presence at trade shows, perhaps even provide developer grants to fund promising projects that show off the power of your protocol. For this reason, the Consensys Ethereal Lounge at Davos features funky club lighting, custom cocktails from a house mixologist and a living wall to accompany talking-head panels featuring Adam Lindemann discoursing on the tokenisation of the art market. We get Snoop Dogg headlining a Ripple party in New York City, and Irfan Aulia, an Indonesian musician, joining with his government to promote a blockchain project to help manage digital music royalties. Blockchain is truly rock and roll in all senses of the phrase.
Over-amplified promotion is hardly original thinking in the tech sector. Former Microsoft games executive Alex St. John, who helped create the Xbox, ordered a ‘$2 million alien spaceship to be built as part of a gigantic game promotion’ according to Dean Takahashi, and would host lavish, extraordinarily creative parties. If you want to get an idea of what I’m talking about, feel free to look up the launch of id Software’s breakthrough title DOOM, but please not from a work computer!
There is a storied history behind over-the-top promotion for tech, and the open-source efforts of the blockchain builders are no exception. When this activity carries over into regulated financial services, however, we run into issues . . .
A number of blockchain token issuers have gone to great lengths to try to sound like they’re not issuing securities. ‘We’re a foundation,’ DFINITY insists, ignoring the substantial number of tokens held by founder Dominic Williams. Former CFTC regulator Gary Gensler cautions against ‘hasty regulatory pronouncements’ and tries to normalise bitcoin by claiming it’s just as arbitrary in value as gold. Instead of ‘investor relations’ token issuers talk about ‘community relations’ and ‘community initiatives’, but what they are doing is engaging in public dialog with people who have put money into a particular cryptocurrency or token, and those people expect the value of the token to go up. They are quite vocal when the value of the token goes down.
‘HODL,’ they shout, a typo that turned into a meme to represent a buy-and-hold ethos. Statistically, given the volatility of the top ten tokens, they can’t all be HODLing. Speculation is rampant. Indeed, one of my former students paid for grad school and a down payment on a house by speculating on bitcoin.
Regulators who still work for a government, versus regulators who used to work for government but now work on behalf of private interests, have by and large taken the stance that token issuances are securities. The United States, most notably, has taken this stance, but other jurisdictions have also gone along a similar path.
There are notable exceptions. Domiciles like the United Kingdom have put forth specific regulation that identifies ‘securities tokens’ versus ‘utility tokens’ versus ‘exchange tokens’, with different scrutiny and reporting requirements for each.
The activity of ‘community affairs’ is functionally similar to investor relations. The company issuing the token wants to regulate demand so that they can continue to raise money to fund operations and the founders’ personal spending. They engage with a large number of institutions and individuals who purchase, sell and, in some cases, buy derivatives on, digital tokens. Their engagement with their communities includes the broadcasting of company endorsements, and breathlessly touting this software release or that government initiative using the token. Rejoice! HODL!
In most circles these activities would be deemed investor relations, and thus the nature of information that is communicated would be subject to regulation and oversight by securities agencies. Regulators are less concerned with billionaires throwing play money at cryptocurrencies, and more concerned about the working poor leveraging their credit cards to buy a volatile security that is manipulated and then crashes, creating a cycle of debt for an already strained household.
Techniques for promoting crypto tokens include events; information sessions; webinars; email lists; press releases; actively managed chat groups on Telegram, WhatsApp and other platforms; news interviews; parties; digitally broadcast promotional stunts; and practically anything else an array of clever minds is able to conjure up. PT Barnum would be proud.
A number of token issuers have taken to the barricades, insisting that the right to sell a digital asset is a fundamental liberty.
Riding the hype train
Consulting firm Gartner has posited that all new technology goes through a predictable hype cycle of rising expectations, overinflated promises, despair on discovering the disappointing truth, and then some productivity plateau when the real applications of the technology are deployed. Blockchain technology may be past its absolute peak, but still has a bit of froth surrounding its appeal given the nature of projects that continue to receive funding from well-intentioned investors.
Blockchain is both more, and less, than it is purported to be.
The discerning executive must be able to tell the difference between a meaningful business opportunity and another piece of vapourware backed by a Ponzi scheme. Make no mistake: the blockchain revolution offers ample helpings of both.
To help weed through the dross for the valuable nuggets, my colleague Meltem Demirors and I have developed a set of frameworks to facilitate rapid understanding of blockchain protocols and technologies – what we term the Oxford Blockchain Frameworks - found in the book and elaborated on in our online programme, OxfordBlockchain.org
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Next week, Part 3 will explore applications of blockchain to problems of industry