Video - Bitcoin Dumb Networks, Innovation and the Festival of the Commons
Talk recorded on January 27th 2015, at the O'Reilly Radar Summit "Bitcoin and the Blockchain" in San Francisco, CA. A talk about bitcoin, network architecture, decentralization, innovation, and the economics of open systems.
Andreas: I am so happy to be part of this O'Reilly event. I've been a huge fan of O'Reilly as a publisher. If you're a developer and you don't have at least one shelf full of O'Reilly books, you need to try harder and I've been a huge fan. And so when I set out to write this book a year and a half ago, first of all, I'd never written a book before so that was pretty crazy idea. And then the idea that I could pitch this to O'Reilly and they'd pay any attention was even crazier. And yet here we are and I can't quite believe it. So thank you so much for coming and thank you to O'Reilly for trusting in me to write this book. But I want to make a small correction for the record when the Canadian Senate said that I literally wrote the book on Bitcoin that just showed that it also didn't understand open source because I didn't literally write the book on Bitcoin, I wrote a Bitcoin book with the community support more than 150 contributors. The entire book was written on GitHub as an open source project. Thanks to O'Reilly's ability to understand the value of that kind of approach. It's been released as an open source book. It's available under a Creative Commons license. And for many people that means they can read this book for free and understand this technology without paying a dime. And that's really important because this technology is not just about the developed world; it's very much about the developing world. And we need thousands and thousands of developers to learn this stuff. And so thank you for helping me write this book. If you are involved, I really appreciate it.
All right. Let's get started. I want to talk about dumb networks, I want to talk about smart networks, I want to talk about the value of open source when it meets finance, and I want to talk about the festival of the Commons. So first of all, Bitcoin. Is that a technology? Is it a network? Is it a currency? It's all of the above, even when we end up with it with a subject for the conference, which is kind of hedging, you know, Bitcoin and the blockchain. If one works, maybe the other will work. Let's try both, see what happens ten years from now, if one of them is failed. Spectacularly, we had the other one in the title, we got it right. Have you noticed that trend? A lot of people are doing that lately, which is, you know, two years ago they were saying "This is all a complete joke. It's all just a whole pile of BS. It's a Ponzi scheme. It's a crazy libertarian dream." And, of course, that message started becoming less and less credible as this little relentless anomaly of technology refused to die, despite the dozens of obituaries written about Bitcoin, it refused to die. So the message this is all BS and it's going away started sounding not so credible. So now, we've got this triangulation of the message. The media is refining the message. They're saying, "Well, yeah. The currency is a joke. But the technology, I don't know, maybe there's something there." Give it two more years of relentless anomaly refusing to die and maybe they'll start paying attention to this, particularly if it's gobbling up a couple of billion-dollar industries and really disrupting the competitive landscape.
So Bitcoin is a currency. Bitcoin is a network. Bitcoin is a technology, and you can't separate these things. A consensus network that bases its value on the currency does not work without the currency. You can't just do the blockchain without a valuable currency behind it and the currency doesn't work without the network. And so Bitcoin in the end is both. It is the convergence of a participatory consensus network and a global borderless currency that is fungible and fast and secure. But I want to talk a bit about the network and focus on one concept and make some parallels to the early internet. Bitcoin is not a smart network, Bitcoin is a dumb network. It really is a dumb network. It is a dumb transaction processing network. It's a dumb network for verifying a very simple, very, very simple scripting language. It doesn't offer a complete range of financial services and products. It doesn't have automation and incredible features built in. It is simply a dumb network. And that is one of its strongest and most amazing features.
Because when you design networks, when you architect network systems, one of the most fundamental choices is this: do you make a dumb network that supports smart devices or do you make a smart network that supports dumb devices? Now you're probably familiar with some smart networks, so I'll give you an example, the phone network was a very smart network. The phone at the end of that network was a very dumb device. If you had a pulse dialing phone, that thing had maybe four electronic components inside it and it was basically a switch on a wire with a speaker attached to it. You could dial by flicking the hook up and down fast enough, right, because it was a dumb device, it had no intelligence whatsoever. Everything the phone network did was in the network. Caller ID is a network feature, call waiting was a network feature. And if you wanted to make the experience better, you had to upgrade the network, but you didn't need to upgrade the device. And that was a critical design decision because at that time the belief was that smart networks are better because you can deliver these incredible services just by upgrading the network for everyone. There's one small disadvantage with smart networks. They have to be upgraded from the center out and innovation occurs at the center by one player and requires permission. And as a result, innovation only happens when a feature is needed by all of the subscribers of the network when it is compelling enough to disrupt the function of the entire network to upgrade it.
The internet is a dumb network. It's dumb as rocks. All it can do is move data from point A to point B. It doesn't know what that data is, can't tell the difference between a Skype call and a webpage. It doesn't know if the device on the end is a desktop computer or mobile phone, a vacuum cleaner or refrigerator or car. It doesn't know if that device is powerful or not if it can do multimedia or not, it doesn't know, it doesn't care. And in order to run a new application or innovate on the dumb network, all you have to do is add innovation at the edge because the dumb network can support smart devices. And in order to add new applications and innovation, you don't need to change anything in the network. You push the intelligence to the edge. And now an application that only has five users can be implemented as long as those five users upgrade their devices to implement that application and the dumb network will transport their data because it doesn't know the difference and it doesn't care. Bitcoin is a dumb network supporting really smart devices and that is an incredibly powerful concept because Bitcoin pushes all of the intelligence at the edge. It doesn't care if the Bitcoin address is the address of a multimillionaire, the address of a central bank, the address of a smart contract, the address of a device, or the address of a human, it doesn't know. It doesn't care if the transaction is carrying lots of money or not so much money at all. It doesn't care if the address is in Kuala Lumpur or downtown New York. It doesn't know. It doesn't care.
It moves money from one address to another based on a simple locking script. And that means that if you want to build a new application on top of Bitcoin, you can upgrade the end devices and you can build an application and you don't need to ask for anyone's permission to innovate, right. The app launched it on your endpoint and Bitcoin will route it because it's dumb, and that is the power innovation on the Internet. It's innovation without permission, it's innovation without central approval, it's innovation without broad network upgrade and it means that Bitcoin is not a specific financial network work. It's not a financial network for large transactions or small transactions or fast transactions, or slow transactions; it's whatever you want to use it for based on what you do at the endpoint. Now compare that to the current banking system. The current banking system is built around very smart networks, absolutely in tightly control to deliver very specific applications to very dumb endpoints.
Even with your most sophisticated online banking, all you can do with your bank is access some HTML that delivers a set of services that they decided that we're going to give you with no APIs and no ability to run additional applications, and no ability to upgrade or innovate or change anything unless the entire network changes to support your new application. And that network is either a network for large payments or it's a network for small payments or it's a network for fast payments, but it's not all of the above. And Bitcoin is all of those things because it's not discriminating, it's neutral, it doesn't care, it's dumb.
The power of pushing intelligence to the edge of not making decisions in the center moves the innovation into the hands of its end-users and gives those end-users the ability to build applications that are so niche, that only a handful of people around the world need them. And they can build those applications without asking for anyone's permission. But there's one more thing that's really unique about Bitcoin and is one of the reasons that it continues to survive and continues to win over the centralized closed networks of the past. And that is that Bitcoin is open source, open standard, an open network. One of the key concepts in economics is the idea of a tragedy of the Commons, which is when you have a common resource that can be consumed without limits by all those who participate until it's depleted and the entire system collapse, a form of market failure called the tragedy of the Commons. And the most common example of that is the Commons, the old British sense of a large grassy area that you have, a field that everyone can graze their cattle on. And if everybody goes and grazes their cattle with reckless abandon before long, you have a big muddy pit and no cattle because everybody overgrazes it until that resource is depleted. Bitcoin doesn't suffer from a tragedy of the Commons like most financial networks do. I can't innovate on somebody else's network. When visa innovates only visa wins. When MasterCard innovates, only MasterCard wins. If a feature is deployed on SWIFT, I don't get it as a consumer. If Bank of America makes something new and snazzy, they do it competitively and at the exclusion of every other bank that didn't implement that feature. Bitcoin is a common resource whose use increases the value of that resource at the exclusion of no one. If a company builds a new feature that can be used on Bitcoin under open source licenses, that feature can then be used by everyone in the ecosystem. And that means that it enriches everybody's use.
So if a company invests money in Bitcoin the protocol they benefit, but so does everybody else. And when they play in the Bitcoin sphere, they get to benefit from everybody else's investment in that space. So it returns multiple times. You get this wonderful synergy where each company that invests in this amazing technology makes it better for everybody else. It's not an exclusionary principle. So instead of a tragedy of a Commons, you have a festival of the Commons. A Commons that gets better with the more companies that are using it. Just look at some of the examples, 2014 was supposed to be the worst year in Bitcoin. And that's only if you are paying attention to the price because in 2014, on the Bitcoin network, we saw the deployment of two incredible technologies. The first multi-sig which required a tiny change to the core, but then allowed an enormous amount of services and products to be built at the edge and hierarchical deterministic wallets, which didn't require any changes in the core and allowed us to have these incredibly complex and rich experiences in the wallet space. The companies that invented and deploy those two features did so in 2012 and we reap the benefits today.
And on the back of those two inventions, we saw an entire ecosystem of new products and services. The value invested by one company two years ago blows up and creates an entire range of products in a new industry two years later. And in 2014, during the worst year of Bitcoin, 500 startups received $500 million in investment generating tens of thousands of jobs. And none of that innovation has come back yet because they just started, give us two years. All of the incredible technology advancements we saw in 2014 happened from inventions that were done two years ago and just started reaching broad adoption. Now what happens when you throw 500 companies and 10,000 developers of the problem, "Give me two years and you will see some pretty amazing things in Bitcoin." And that is the advantage of the festival of the Commons.
So while journalists are writing yet another obituary for the death of Bitcoin, I look at an ecosystem of openness, I look at an ecosystem that is generating jobs in an economy that is mostly dead, I'm looking at an ecosystem that has some of the smartest people I have ever met creating the most amazing innovations. And the really amazing thing about this is that we all benefit from all of this. We're not really competing against each other. When one Bitcoin company builds something amazing, everybody gets the benefit. Bitcoin gets better for everybody. And as a result, we're seeing a rate of innovation that not only is not slowing down, but is accelerating. It's already at breakneck speed and it's accelerating. You put an open decentralized ecosystem with the festival of the Commons, open source, open standards, open networking, and the intelligence and innovation pushed all the way to the edge. So the users have control over what they innovate on and how they invest their time and money and spirit into this technology. Put that against a closed system controlled by a central provider whose permission you need in order to innovate and who will only innovate at the exclusion and competition of all of the other companies and we will crush them.
People ask me, "Well, what happens if Goldman Sachs builds Goldman Sachs coin?" "Let them build it." If it's really open and decentralized they just prove the whole point of this and we can all go home declaring victory. If it's closed and doesn't allow open innovation, it will become stagnant in just a few months while we continue accelerating ahead with more and more innovation feeding off each other's invention. You cannot stop this. So that's why I'm excited to be in the Bitcoin space, a dumb network. So puts all of the intelligence and innovation at the edge so that we can innovate without asking anyone's permission and we can participate in this incredible festival of the Commons. Thank you.
So we have a bit of time for Q&A. And I would love to take audience questions. We don't have any microphones, but if you shout your question I'll try to repeat it for any recorded sessions. Anyone have any questions for me? Yes.
Unidentified Male: What are your thoughts on the sidechains strategic proposal, sensibility?
Andreas: What are my thoughts on sidechains? Sidechains is a proposed mechanism for being able to transfer value from one blockchain to another in an automated fashion without having to use a centralized exchange, but instead using the decentralized power of the consensus algorithm on each of the blockchains to achieve a two-way peg. Sidechains show how far we've come from 2009, while in many cases some of Bitcoins biggest detractors are looking at Bitcoin as it was in 2009 understanding a third of it and coming up with a list of criticisms. We've built a whole new area of consensus algorithms, a new blockchains, new altchains, the innovation is incredible. And one of the things I really like about sidechains is the ability to accelerate that innovation because what it does is it allows you to take specific features, perhaps features that would be disruptive or that will require some upgrades to the common infrastructure and test those on a sidechain so you could run a betachain. You could branch and merge features from one chain to another. You can also experiment on a variety of alternative currencies, alternative chains and alternative applications while backing them with the reserve value of Bitcoin, Bitcoin as a reserve currency. And by extension, its security. So you have a secure basis in Bitcoin, you have a value basis in Bitcoin, you can use that to bootstrap young innovations applications and chains. One of the big challenges in this area today is that it is very difficult to bootstrap a robust and resilient's blockchain and consensus mechanism, you need miners to combine for you. And if it's too small, it can be attacked, it can collapse, it can suffer various failures. Bitcoin has done that. Rather than trying to replicate that success, sidechains allow us to build on top of that and leverage it to use other applications and chains. So I'm very excited. So far, we've seen a paper. There's a lot of really exciting research and there's some very, very smart people working on developing code. I'll reserve further judgments until I can run that code. All right. Questions? Yes.
Unidentified Male: Do you have any thoughts on the role of regulators and compliance and how it may benefit?
Andreas: Do I have any thoughts on the role of regulators and compliance and how it can benefits Bitcoin? Yes. I have many thoughts. I have delivered some of those thoughts in less than polite terms in other forms. So I'll keep them a bit more circumspect right now. Regulators have failed to protect consumers, regulators failed to put bankers in jail, regulators failed to stop fraud and crime on an epic proportions since 2008. We have found out that gold is rigged and markets are rigged, that mortgages were fraudulent and rigged, that entire foreign exchange mechanisms were rigged. And so far no one's gone to jail. The fines that they have charged are less than the profits made from the fraud, and that is a license to continue crime. Until regulators start protecting consumers, I don't think they have anything to add to Bitcoin. Bitcoin allows us to do consumer protection by putting control in the hands of the consumers themselves. Bitcoin is consumer protection because privacy is consumer protection. Bitcoin is consumer protection because user control is consumer protection. Regulators, they're just helping banks avoid competition. And as far as I'm concerned, when you're press releases are written by the banks you're supposed to be regulating, you should be in jail, too. And that was the mild version. Yes.
Unidentified Male: What do you say to the argument that Bitcoin can only be at once that * 00:21:51 cheap transactions built later when no more Bitcoins were generated and the money spend to mining will be proportional to the money spend--
Andreas: Okay, what do I say to the idea that Bitcoin is essentially a trade-off between either cheap transactions or secure transactions? Because eventually the reward runs out and you start only getting reward for miners based on transaction fees. First of all, that doesn't happen for 132 years. And as far as I know in 132 years, we'll be looking at a Bitcoin interplanetary network and I'm less worried about how we optimize the blockchain today to achieve that. A lot of this is a matter of optimization. And quite honestly, I don't start getting worried about a problem until we start seeing signs of a problem or even, tiny, tiny examples of that problem. Part of my experience comes from reading this kind of concern journalism, I'll call it, to avoid calling it concern trolling. But the idea here is that when I was working on the internet, for example, every year without fail there was an article that came out that said "Ethernet has hit the limits of physical science and physics, and here's proof of why Ethernet cannot exceed one megabit." And the next year was, "And here's proof for why Ethernet cannot exceed 10 megabits." And a year later was a gigabit. And a year after that it was 10 gigabits. And every single time there was a Ethernet about to die, we've seen that with IP that won't/can't possibly scale we're going to run out of IP addresses and the whole thing will collapse, search that won't/can't possibly scale we're going to run out of the ability to do things and it will collapse, storage, you know. All of these doom scenarios, they assume the technology is static. They also assume that when you have something of value there won't be someone to innovate and solve the problem. So to all of these problems, what I see is opportunity. In 1995, every article about the Internet said that it would fail because you could never find anything and some people saw that as a problem and they did a lot of rending and pulling their hair out and crying that the internet would die. And a couple of guys formed Google and decided to solve that problem. Now they've got a 400 billion industry. So you can either look at it as a problem or you can say, "If I solve this, what kind of value can I generate in this industry?" And so far, I have not seen any problems in Bitcoin that are unsolvable. These problems are technical, but they are solvable. The concerns are mostly academic and the network is incredibly dynamic and resilient. So in summary, I'm not worried about optimization. I'm not worried about scaling. For every one of these problems I've seen, 10 proposed solutions long before these problems are actually real. And I think we're going to see Bitcoin continue to scale, continue to grow and to adapt to these challenges without any difficulty. Thank you.
Let me take one last question. Sorry, I can't see. Oh, there you go.
Unidentified Male: Did you see a role for academic research as including Bitcoin in the future?
Andreas: Academic research? Yes, absolutely. I see a role for academic research. In fact, there is an online repository of academic papers written for Bitcoin. And in 2013, I think there were only like four or five. And in 2014, there are about 150 papers. I know of dozens of people that are doing their PhDs in Bitcoin. As far as I'm concerned around Bitcoin we will not only see academic research and consensus algorithms and distributed computing, I see entirely new scientific disciplines arising out of Bitcoin. Think of it this way, today, if you want to do macroeconomics you can study economies on a six-month ex post facto statistical approximation. With a blockchain, you can do computational macroeconomics in real time on real data. Today, if you want to study the activities of an economy or you can want to study the activities of an industry sector or a specific company for microeconomics, again, you can only do it ex post facto six months later with a statistical approximation. And on the blockchain, you can do computational microeconomics in real time. Big data analytics on the blockchain is an enormous area for study. For the first time, we can do things as humans where we can look at the economic activity of very, very large populations in the aggregate and mostly anonymous, which is actually a good protection because you can't easily deanonymize this data. And at the same time, you can gain enormous value. So, yes, academic research in Bitcoin is great. And most importantly, not only is it happening, but I expect new scientific disciplines to rise out of this incredible invention. Thank you.
I think we have time for one more if anybody has another question. Yes.
Unidentified Male: What's the title of your next book?
Andreas: The title of my next book, I'm not sure yet. But I'm thinking the Blockchain Design Pattern. I want to talk about the use of the blockchain design pattern as a basis for building a variety of applications. So it's slightly different from my first book, but really an extension. I found out something. Recently, my sister had a baby. It was a wonderful experience for me as an uncle, first-time uncle. And she told me right before that she absolutely hated this experience, she hated it. She really, really suffered through the whole thing. And then two minutes after the baby was born she was like, "You know, I'd like to have another baby." And I've heard that that's a common experience for pregnancy, you know, you absolutely hate the entire nine months until the very last minute that you think, "Why am I doing this? This is absolutely horrible. I'd never do this again" until one second after the baby's born. And then you go, "Yeah, let's have another one." That's how I feel about writing books. The eight months run up to actually publishing was some of the hardest times of my life. It was very, very difficult. I won't, of course, compare it to childbirth. That is really a marathon, endurance, and amazing, but it was really difficult. And when I was doing that I never wanted to even think about writing another book ever again in my life. And the day it hit the publisher, I was like, "Hey, maybe I should write another book." So thank you so much for your support. Thank you so much for coming.
A couple of quick notes, there is also a great video series. The gentleman who introduced me, Lorne, has done a great video series on O'Reilly, which is a video training series called Bitcoin & the Blockchain. If you're interested, you can find that on oreilly.com. Also, tonight at 7:00 PM at the Internet Archive, the San Francisco Bitcoin meetup group is doing a social gathering. And if you like coming to Bitcoin conferences, you know, one of the most important things for me is meeting people in the Bitcoin community. Bitcoin meetups are one of the most vibrant aspects of this community. It is a wonderful space to meet other people who are passionate about this technology. Check out the Bitcoin social tonight at 7 at the Internet Archive. And thank you so much.
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