Video - Bitcoin 101 - A Million Killer Apps - Part 1 - Smart Contracts And Bitcoins Big Bang of Disruption

Too often a conversation about Bitcoin leads to some sketpic suggesting that Bitcoin has no killer app to take it to the next level. Nothing could be further from the truth. We've grouped together all the currently, under development, and already launched killer apps of Bitcoin, and in short order they became too numerous to count. So we had to break them up into three big videos which we've decided to call 'A Million Killer Apps'. Wall Street take note, most of what you do is on the list.


Hello, this is James D'Angelo and welcome to the Bitcoin 101 blackboard series. Today we are looking at Killer Apps and this is going to be part 1 of a 2 part series specifically looking at all the killer apps of Bitcoin and blockchain technology. And because there's way too many to count we've decided to call this video a Million Killer Apps. So, you can kind of think of this is a primer for venture capitalists or those folks who like to think about those types of ideas and the slides that you're going to see today came from a talk that I gave a few weeks ago at Harvard Business School. And I got to say it was really exciting to see these young business folks starting to consider Bitcoin for the first time not just as a currency but as something that's starting to show its influence in a number of different areas and even create a massive number of opportunities.

And Bitcoins explosion into so many different areas, is kind of overwhelming for those of us who like to stay on top of what Bitcoin can do. In 2013, you could pretty much read all the news and kind of follow everywhere the Bitcoin was going. That's no longer possible for any single person to do in 2014. It's moved into so many places with so many levels of complexity that any single individual cannot keep up with what's going on. So, this is 2014's Big Bang and in particular this is the year that we are starting to look beyond Bitcoin as a currency and look at it more as a disruptive technology.

Now, to understand most of these Killer Apps, it's absolutely essential that you understand this idea of smart contracts. And it's not complex at all. We're going to be looking at a basic contract and that one basic contract can really be applied to almost everything we're going to be talking about today. Okay. So, the simplest smart contract really is just an if and a then. Okay. So, if I go to school then I will see my teacher just a simple statement where you have an if and then something happens. Almost all contracts, even most legal contracts are based on the simple ideas, if my partner quits then the money will be divided this way. If this Musician writes this part of the song then he will get this percentage of the royalties. And this isn't some futuristic dream, this idea that you can have smart contracts it's already been under development and been working now for a number of months so a company named Counterparty builds this right on top of Bitcoins blockchain but there are other offerings that theory and such which provide their own blockchain which allow for smart contracts.

So, to fully understand this let's take a look at a bet which is the simplest of possible contracts. And right here we've got pseudocode, so sort of this fake code that I wrote to show the idea of how a smart contract might be implemented in software. And this particular code is based on Harry Potter going to MIT and what might his grades be and someone wants to make a bet that he's going to get a 4.0 GPA. And let's look into this codes, so we can get a full idea of what's going on.

So here's our 'if' and this return over here is our 'then' and here is the bet. If Harry got a 4.0. Okay. And then we have some verification data if Harry first name last name Potter born on x date, all the verification data that you want to put in if he gets a 4.0. Well, how do we know he gets a 4.0. That's when we rely on something called an oracle. And an oracle is pre-agreed upon. So whoever is making the bet they're going to agree that this oracle is going to be the thing that's going to make the decision. In this case, it could be MIT's admin registrar right here which actually publishes his grades online. So you would go to this site and you would have this login key and you would be able to see Harry Potter's grades on the date of graduation. So, the oracle in this case would just be MIT but you could see the oracle being say ESPN and a sports event or thousands of things. So if you don't want to trust just one centralized party say ESPN, for example, we could load up all the sporting sites and then you could have individuals acting as oracles providing this information online and then you would take the majority of them, 95% of them or even all of them, whatever you want to put in your bet as the form of agreement is what will happen.

So, upon Harry Potter's graduation this code right here will dig into this site right here putting in this log in code to check Harry Potter's grades if he has a 4.0 then we will send 10 units. Okay. So, this is the payout it could be dollars, it could be Bitcoins, it could be dogecoins, it could be euros, it could be whatever we agreed on. Again, as long as we agree beforehand on the bet. Well then we have a nice little contract. Then we will send 10 Bitcoins, for example, to this Bitcoin address right here which is the payee. Okay, so this is the most basic contract and you can add thousands and thousands of lines. You could add condition, say, for example he dies beforehand or that MIT does not have some great posted forms so the bet can dissolve. Whatever we want to put in we can write in, we could pull contracts offline, use already pre-made contracts as long as the two parties agree and we have an official bet.

And what's really cool about this and why this is revolutionary is the money in a Bitcoin contract for a crypto currency contract is placed inside the bet so you actually put the currency inside a decentralized server that's just sitting there waiting for the bet to resolve upon his graduation. If he's got a 4.0, the currency will actually leave the bet and go to the payee. Okay, this is outrageous. Why? Because it doesn't require an Escrow, it doesn't require someone to hold that money. It's decentralized. No individual is holding this so the money is just sitting there in thin air waiting for the bet to be resolved. Okay, so in Escrow traditionally just for a real quick example say I was making a bet with someone I didn't like over Harry Potter's grades. Well, we would need someone as an Escrow to hold the money for us for that bet to actually work properly because if I didn't like them and I lost the bet I'd probably run away with the money and he'd likely do the same. That's why you need a trusted Escrow service in traditional betting setups.

Well, here as long as both of us sign away these funds using our private keys the money sits in waiting to be resolved by the code of the bet. It's a smart contract. So as a result this eliminates the need for counterparty risk. Here, I might be worried about the person I bet with trying to leave with the funds. Also, I might be worried about the Escrow service leaving with the funds or not making the correct decision. These are counterparty risk that you have when you're placing any sort of bet and here we've just got quick definitions of Escrow and quick definitions of counterparty but you're starting to get an idea of how these simple, simple contracts work. But here in this cool post by this guy named Foolish Austrian here on read it. We see this idea that we're not going to need a third party or a counter party in so many places and this is where this individual is seeing Bitcoin explode, right. So, let's go through his post real quickly. If successful Bitcoin changes pretty much everything. To understand Bitcoin you have to imagine a world where you can buy without a merchant that without a bookie. Okay.

Bookie being the third party being the escrow get insurance without an underwriter, here again third-party sort of an escrow access finance and loans without a bank. Bank in most loans is the third party, they're handling the money between the lenders and the loaners. Okay, third party gets removed. This is key for almost all ideas that we're going to see today. This explosion of Bitcoin has everything to do with the elimination of this third party and elimination of this escrow and the ability to actually put value inside a bet. And a lot of people are probably watching this and go wow! what's so big about betting, I'm not a big better.

Well, it turns out most of what we consider to be financed or investment is just a more complicated. I didn't spell it right, complicated form of betting. Okay. So, if you're talking about betting on the Red Sox games, well, that seems pretty easy but now imagine if we're talking about doing cotton futures. That's really just a bet as well, you're betting on the price cut in six months to a year or 10 years or you're betting on the price of gold or your arbitraging between a few of them or you're actually investing in companies. These are all just bets where you're putting money down, you're running the simple contract if the company does well I make x amount of money. If cotton's price is this I will pay this. Okay. These are simple if then contracts. So most of what we consider to be financed and investment is really just a form of betting and it can be done with these very simple "if, then" contracts.

And this is why we see this possibility of having a million Killer Apps in Bitcoin. Okay, so contracts are the non-currency disruptions that Bitcoin can provide. And here we have this underlined by a very recent article from The Wall Street Journal where Michael Casey here is saying if you're just watching Bitcoin's price you're being a fool because you're missing this revolution of technology. Bitcoin is much more than a currency. And we don't need a crystal ball to tell you about all this stuff because a lot of this stuff has already begun to happen. In fact, everything that we're going to be talking about this video or disruptions that have already begun to happen. And we're already seeing massive venture capital money flying into Bitcoin.

So if you were following Bitcoin in 2012, well, in 2012 there was $2.1 billion of ventured capital funding put in. The following year there was $93 million. And as of today, we're still at year today we're almost at the end of the year there is $314 million that have been poured into Bitcoin and all of these spaces that we're going to be talking about today. And this is just the declared money. So, there might be lots of other money and personal money floating around and this doesn't include all the money that people have put in just to Bitcoin itself. So a lot of investors talk about, how to invest in all these spaces. Well, one of the best ways is just to buy Bitcoin itself. There are billions of dollars that have been poured into just buying Bitcoins. So, Bitcoin as a ventured capital space is easily one of the biggest spaces in the last few years. It is destroying other forms of startup technology in terms of venture capital.

And despite all this money that's pouring in you're still hearing VC saying this. Well, Bitcoin is pretty exciting as a technology. I'm just not seeing the Killer App, right. People are writing articles. Well, the Killer App for Bitcoin has not arrived. And what's really ironic about this especially when you listen to VC's talking is that the VC space in particular is where Bitcoin is coming really hard. Okay. This whole idea of how ventured capital is distributed and how ventured capital is raised is being shaken up dramatically. We've seen a lot of talk about how crowdfunding works and this growth of crowdfunding and new legislation being passed to allow for more crowdfunding. Well, Bitcoin plus crowd funding makes an enormously disruptive technology for a number of reasons. It allows for crowdfunding to happen all over the world in places where the regulatory constraints are different. We're seeing this already happen, IPO's being done with Bitcoin. But it's important to realize that Bitcoin attacks this idea of traditional ventured capital on many levels.

And one of the most interesting is to consider the idea of doing micro investing. Micro ventured capital, things you could never do before. Imagine, if you launch your IPO on Bitcoin and limited investment to one penny per person. I mean, this is something that most ventured capital would laugh at right now most companies won't even think about doing but this is because traditional payment rails don't allow for the easy transfer of small amounts of money. And they don't allow for the ability to track that money. If you're doing ventured capital you want your investment to be trapped forever so if the company starts to grow you get paid dividends. So, if you're putting in one penny no one wants to deal with it, right because they have to do all this accounting and they have to keep track of all these individuals are putting in a penny. Well, Bitcoin because it's a public ledger that's all stuff that's done for free. That's just built in. So you could literally launch an IPO where you limit the investment of each person to one penny. And if every person on earth decided wow! that company is great and puts one penny in per person you're talking a seed round of over $70 million. Okay.

And if you just did this in United States you'd be talking seed round of around $3 million. This is limiting investments to a penny. This changes the way we look at seed rounds and ventured capital. Right now, we've got the SCC with all these rules based on 1934 when money wasn't transferred very easily, tracking money was very difficult and they are limiting and controlling investments. It would be really provocative to see everyone allowed to invest $10 a year, for example, and they could all put small amounts into whatever companies they thought were exciting and we see brand new companies springing up with very, very tiny investments. So, this whole idea of venture capital is being disrupted right now by Bitcoin.

Here it's worth taking a second to talk about the transparency aspects of Bitcoin. Bitcoin offers two things the world has never seen before in a currency. It offers the ability to have perfect transparency. So every transaction your company does you could publish in such a way so that everyone would believe it and everyone would be able to follow it as it's happening. You could have perfect transparency, very important if we look at the ideas of government. Imagine if the 2008 bailouts were done under full transparency instead of what happened, but you also have the other possibility which is perfect anonymity. And a lot of people go oh! Bitcoin is not perfectly anonymous, you'd be able to track all the transactions, well, this technology is changing fast between dark wallet and coin tumblers and all these things, we're going to see the ability to run all your Bitcoin transactions with as much anonymity as you want and the user can choose that. They can slide this slider right here between full anonymity or full transparency and get however much they want.

I believe we're going to see a lot of competition both sides so we're going to see companies that are competing to show full transparency charities, individuals say running for office or governments for example will show full transparency linking all their Bitcoin accounts to their name such as any money coming in and all money going out is there on the blockchain. And then we'll see others who are trying to hide everything using Bitcoin's ability to do full 100% anonymity. Okay so it's important to realize it does both of these better than anything's been done before. And this is really important when we start to think about Bitcoins explosion into the space of securities. What could be better than to buy stock into a company and be able to see all of the stocks of that company moving when they're being sold immediately by anyone, any individual could count how many shares they are. You really can't do that right now you have to trust your investment bank, you have to trust the company that they're not printing up more of these cool pieces of paper with nice seals on it and crazy serial numbers. But you don't know if they've not printed up 10 with the same serial number. You just don't know it's not fully transparent, but with Bitcoin you could do this thing called colored coins where you actually tag specific, very small units a Bitcoin and call them shares. They can be traced forever, dividends can be paid on those forever.

So you can trade in sale stocks in your backyard but all these transactions will immediately go public and on the blockchain without you doing anything more than just selling it the way you normally would. And this is why you have a major investment happening right now by Patrick Byrne and he's teaming up with the guys from counterparty who I mentioned earlier and they are developing a full-on competitor to traditional stock exchange. And because Bitcoin does stocks and shares so much better than how it was done traditionally we're going to see in 2015 disruption in the space and we're going to start to see companies launching their IPOs on crypto currency exchanges.

Another area where Bitcoin could easily move in because it's ability to run small recordable and fully transparent transactions is this idea of insurance. Right now, most insurance is done through this big centralized behemoth where you pay this big company AIG for example and when something goes wrong they supposedly will pay you out. Everyone knows that not every insurance company pays out all the time. They always find some loophole or some problem with what you're doing and they try to pay out less. They hire their lawyers to make your life miserable. Well, the other way that we could do this is through this idea of micro insurance. Okay. Well, micro could be, we insure very small things which is pretty interesting but the opposite say, you have a $1 million home and instead of going to just one big giant to run that insurance. You go to a million different individuals each with a raiding scheme showing how often they pay out those $1 insurance schemes that they provide. And all of a sudden instead of having one big company that you have to deal with when things go bad you'll have a million different possibilities some of them will pay out some won't. But all of a sudden instead of getting a yes or no from the insurance company you're going to be making some money and you'll have a million different contracts. This is absolutely impossible in the traditional world but with Bitcoin counterparty of theory a million smart contract is really easy to set up and we can put in different oracles and when something happens to your house these companies can all decide to pay out or can actually put the money inside the contract itself and they will payout automatically based on certain oracles. Really provocative change to how insurance can be done.

And the same idea can be applied to loans and we're seeing this already. Okay. So, you can go and look at BTC Jam, they're not the only one, BitFenix does it where you can actually loan money or receive loans to anonymous people or regular individuals in this free market of tiny loans. So, say you needed $70,000 you can get $1 from seventy thousand individuals, all on slightly different contracts at least individuals can pay over the world it sounds absolutely crazy but between algorithms and reputation schemes these can provide real alternatives and real finance to people who don't traditionally get loans and provide real alternatives to how banks can be set up and organize in this decentralized world.

And if you go to BTC jam or any of these companies right now well, you know, we're talking crazy numbers right now. I mean it's a Wild West for sure but this is already starting to disrupt and we're going to see these things get bigger and these rates will come down a little bit but we're going to see more and more loans being done this way. And because all these loan transactions will take place on a public ledger, all this information getting tossed on the blockchain will provide more information to individual loaners and individual lenders, great stuff. And certainly, we have to consider if we're replacing so many of these features of traditional banking. What is this going to do to Wall Street? Well, it's just not clear. It's not clear that Bitcoin will explode and take over these markets so just keep a small percentage. We don't know. This is why it's disruptive, we don't know how disruptive it is. But there are already investors rumbling about what Bitcoin can do and is Naval Ravikant says right here what Wall Street does can be done in code by Bitcoin, and he's really talking about smart contracts really simple smart contracts and these distributed abilities to loan insurer run stock exchanges run foreign exchange services et cetera.

And here's MarketWatch talking about one particular Killer App and that alone is a threat to Wall Street right. This whole idea of a Lending Club, using distributive loans but all of them combined really become very provocative so let's move on. I had mentioned this already but the ability to put everything on the blockchain, every penny investment, every micro-loan, every microinsurance contract, all of that stuff because it's done on Bitcoin will be available immediately in real time online. And these charts aren't done by some enormous company. These are charts done by a guy who runs this site called Neighborhood Pool Watch who's doing real time analysis of all these Bitcoin transactions. As Bitcoin disrupts and enters more and more spaces we're going to see this type of chart and this type of data provided for anyone to use to be able to analyze their own finance. They won't have to go in and ask someone at fidelity what they should do with their money. They're going to be able to make real decisions themselves based on really beautiful analysis. It's done by individuals all over the world. And these individuals say college students, whoever will analyze the data and post it trying to make their name but at the same time providing a service for individuals to use.

So this massive change in our information when we go to buy a loan or we go to do insurance or even track a stock will change everything, real data accessible by everyone. And that's the essence of free market. You need perfect information to have a truly free market. Currently we don't have anywhere near perfect information. Bitcoin's not going to make it perfect any time soon but we'll inch ourselves much, much closer to this idea of perfect information which allows for much freer markets. Okay. So, another Killer App and we've already mentioned a little bit but Bitcoins got built-in smart accounting, right. Some people call it a triple and treat accountant but it's certainly double entry. And one thing that's important when you talk about accounting and that's why this picture here has a pen. You don't do your accounting in pencil, you write it permanently. If you make a mistake you just write another line in the ledger. Bitcoin is similar it writes everything permanently, every transaction every time and that's why a lot of people talk about Bitcoin just as ledger technology or blockchain technology.

The whole idea of this Public Ledger is really what central to the revolution that Bitcoin is and Ledger is straight up accounting. So what Bitcoin provides and I've spoken to some accountants about this is really amazing built in accounting. Last year when I had to do my taxes I had the stuff I didn't do a Bitcoin very difficult compiling all my receipts and the stuff I did in Bitcoin. I hit one button, everything was done that's great. And this built in accounting that's public and you can decide if you want it to be fully transparent again or fully anonymous is a game changer. So this is just another form of Killer App or this is many, many forms of Killer App you get so many different things you can do with accounting, there's so many different things you can do with these things we've spoken about.

Another Killer App Mesh Networks, decentralized storage. This idea where you can take centralized infrastructure be at the Verizon or Comcast and instead of using the centralized service providing all the internet for everybody you have everybody combining to team up and spit the internet back and forth off their own routers. Here, this works pretty good in cities because routers are pretty close, everyone's got cell phones, everything can bound up all those things but there are traditionally been one thing that mesh networks have lacked. The ability to provide fuel for these mesh networks. So say you're driving your car and you want to use a mesh network to make all your cell phone calls. What your cell phone's going to be doing is actually making a smart contract with each router that you pass so if you're passing by a hundred houses and you're making contracts with say 10 of those houses the routers in each of those houses will say, okay, you can use my wifi for this fraction of a second for this contract right here. Tiny, tiny, tiny fraction of a penny but all those contracts as cars are driving by will add up for that individuals providing their router service for free. It sounds absolutely absurd but these mesh networks are already being built and the same idea can really apply to decentralize storage.

So instead of using Dropbox or even Cloud Services for example from Amazon every individual's got the computer online can offer space in their hard drive for people to use to store their information. And again that will be mediated by a tiny smart contract. You have encrypted data on your drive, you can't look at it. For someone else who wants to store their information not on their own computer and that's something they can call up when they're online et cetera. These ideas of mesh networks and decentralize storage aren't that new but they've always been waiting for some sort of payment and contract service that could negotiate all these tiny and crazy contracts and all the small amounts are going to involve.

So once you get the basic idea of mesh networks and decentralized storage you could see how this might apply to shared cars, shared houses, batteries, cloud service, solar arrays, wind power, et cetera, et cetera. So many different areas where these tiny smart contracts could ask for a little power from someone's local solar panel without having to interact with some big electric company in the middle. Very cool stuff. Okay. So here's another Killer App Prediction Markets are the ability to look at events in the future based on a lot of people betting whether that event will happen or not. And it turns out they're much more accurate than asking a team of experts about almost any specific event. Google does this in house. If they're worried about the launch date of one of their releases they'll actually give their employees money to bet for or against the dates on when their software is going to release. And they find that when people are betting specifically if they're betting in a somewhat anonymous way the dates that they're betting on tend to be much more accurate than when they actually upholding their employees. What you find is that the most invested people probably know the most. They're closest to the idea and they have the strongest opinions on it and sort of get this gaussian point on the curve that floats back and forth based on the crowd. The bigger the crowd the theory goes the more accurate that prediction is.

And these things are very easy to implement with Bitcoin. Bitcoin is very inclusive and it provides the essential anonymity to make a true and accurate prediction market. Here is an example. Just grab this one offline. You can actually go and bet whether Hillary Clinton is going to win the presidential election. So, you can bet for or against and you have different odds et cetera. And the bigger these markets are the more obscure and more interesting they could end up being. But we can also get a lot of great data about policies, issues et cetera. Okay. So that's it for part 1 of this 2-part series about Bitcoin's Killer Apps.

We hope that perhaps you've already seen a potential million Killer Apps in the first video because just by combining the ideas the smart contracts that we've presented already there are so many possibilities, so many applications for Bitcoin. Okay. So please remember to like, comment, subscribe, do whatever it is you do and we'll catch you at the next video.

Written by James DeAngelo on December 29, 2014.