Think Bigger. Aim Higher. Go Further.

Month: November 2014

Future Of Money Part 2

In 1801, Eli Whitney went before the US Congress with 10 working muskets. He proceeded to disassemble each of them, mix and scramble all the parts, then reassemble 10 muskets – all of them worked.  Prior to that day, most things were custom made by craftsmen using hand tools. Then, in a flash of geological time, the idea of interchangeable parts was released to the world – it would be impossible to put the idea back in its cage. Extraordinary levels of innovation followed as the industrial revolution was born.

Energy Flow

In the murky world of crypto-currencies, the financial instruments of tomorrow may not necessarily be assembled like they are today. The new applications of decentralized currency are modeled more like “energy” flows rather than individual units of account. Energy exists in many forms such as electrical energy, chemical energy, thermodynamic energy, kinetic energy, nuclear energy, etc., but the objective is always the same, to move something in the physical world – to create change. The value of crypto-currency is proportional to the magnitude of change it can induce.

Future Of Money Part 2

A generalized theory is emerging to define and specify decentralized applications (DApps). This makes them easier to identify, measure, and replicate. If ignored, these innovations have the potential to be extremely disruptive to the insurance industry. If adapted, they can greatly increase the efficiency, variety, precision, and granularity for insurance products of tomorrow.

Not unlike the dawn of the industrial revolution, there is an extraordinary level of innovation in crypto-currencies since the inception of Bitcoin. The objective of these efforts is to move something in computational space such as flipping a switch, verifying a data set, securing identity, establishing order, establishing ownership, verifying capacity, etc.   This may seem somewhat obscure until you realize that these “energies” can convert and combine in immeasurable combinations to form autonomous logic circuits – i.e. complex contracts.

Since all businesses are based on contracts that act upon some physical space, it is only a matter of time before crypto-contracts jump to the physical space as well. As David Johnson, CEO of DApps Fund (a venture capital firm for decentralized innovation) says; “Everything that can be decentralized will be decentralized”. Eli Whitney was said to have uttered similar sentiments.

The early manifestations of this phenomenon are called Decentralized Application (DApps); these are little computational engines that operate autonomously and whose output is determined by an algorithm. The resulting decisions are binary and final. There are three characteristics that an application must have in order to be classified as a DApps. As you read these conditions, note how different they are from a traditional corporate structure.

  1. The application must be completely open-source, it must operate Autonomously, with no entity controlling the majority of its tokens, and its data and records of operation must be cryptographically stored in a public, decentralized block chain.
  2. The application must generate tokens according to a standard algorithm or set of criteria. These tokens must be necessary for the use of the application and any contribution from users should be rewarded by payment in the application’s tokens.
  3. The application may adapt its protocol in response to proposed improvements and market feedback but all changes must be decided by majority consensus of its users.

Next, there are three classes of Decentralized Applications that align loosely to a familiar computer analogy:

  • A Type I DApp is analogous to a computer operating system such as Windows or the Mac OS X, etc.
  • A Type II DApp is analogous to a general-purpose software program such as Word, Excel, or iPhoto.
  • A Type III DApp is analogous to a specialized software solution like a mail merge, or an expense macro, or a blogging platform.

As such, we can expect that there will be a fewest type I DApps, more type II DApps and even more type III DApps.

The more direct definition of these three classes is as follows: 

  • Type I decentralized applications has its own block chain. Bitcoin is the most famous example of a type I decentralized application but there are others. 
  • Type II decentralized applications use the block chain of a type I decentralized application. Type II decentralized applications are protocols and have tokens that are necessary for their function. 
  • Type III decentralized applications use the protocol of a type II decentralized application. For example: A hypothetical Cloud Protocol that uses a type II DApp to issue ‘cloudcoins’ that can be used to buy cloud computing services would be an example of a type III decentralized application.

Taken together we have most, if not all, of the familiar components of governance and interdependencies without the layers of management that are associated with traditional corporations. As you absorb the analogy and definitions, consider how DApps can be nested, combined, and integrated with other DApps to emulate complex contracts.

One particularly interesting DApp that recently launched is called Counterparty . Counterparty is a Type II DApp that performs one single task extremely well.

Counterparty is a betting platform; or we can put it politely and call it an escrow platform. Two parties may enter into an agreement about the outcome of a future event such as a horse race or football game. Each player puts his or her money into an escrow account that is sealed prior to the race. After the results are registered, the DApp autonomously transfers the money from the combined account to the winner.

Now imagine 500 bettors putting their money into the escrow account prior to the contract event. Upon completion of the event, the money is automatically assigned by algorithm to the winners in pre-assigned proportions. It does not take too much imagination to see this as an insurance product, except without agents, executives, managers, office towers or cute little geckos.

Soon, marathon runners can pool health insurance more towards sprains and falls, and less toward heart disease. Mini-van moms can pool auto insurance for number of passengers rather than miles driven. Professionals can pool E&O insurance by peer review. In fact, any affinity group can accurately price the perils that they are also most capable to manage.  DApps are massively scalable; one application can serve infinite users.

The market size of binary betting (sports, insurance, coin toss, etc.) combined with complex betting (contracts for difference, hedging, options, etc.) is in the trillions of dollars. So while Counterparty has only one use case, the use case is massive.  Now imagine 100,000 DApps operating autonomously, combining and integrating into complex relationships – not unlike building a jigsaw puzzle.

There was once a time when craftsmen guilds were the most powerful organization in the republic. Many of us remember the days when labor was increasingly replaced by machinery. The time may be arriving where machinery can also replace management. The insurance industry must become familiar with this environment and have the wherewithal to reorganize itself, before someone else does it for them.


Come Join us At The Future of Money and Technology Summit in San Francisco, December 2, 2014 for my panel discussion on Fueling the Decentralization Movement.


Paige Peterson – Maidsafe

Sam Onat Yilmaz – Dapps Fund

Joel Dietz –

Christian Peel – Ethereum

Moderator: Dan Robles, The Ingenesist Project

Future Of Money – Not What You Think

Power of PeopleNever underestimate the ability of the human species to adapt to changes in its environment.

All humans are engineers. If there is too much friction in a system, they will fix it, or they will replace it. When banks add overdraft penalties, incur service fees, constrain capital, restrict mobility or compromise the public trust in any way, all those engineers will make a “correction.” Money, after all, is a social agreement.

Today, young people are encountering a financial game that they cannot win playing by the rules that are presented to them. The result should surprise no one – they will either not play the game, or they will change the rules. In fact, innovation in banking is happening at an astonishing rate; unfortunately, bankers are not necessarily doing it.

Because banking touches every part of our lives, so, too, will any innovation that occurs in the domain of banking.

Look at Bitcoin. It is more than just a cute new social app like Facebook or Twitter – it is a new idea called decentralization. If it is possible to decentralize banking, it would also be possible to decentralize everything; insurance, engineering, education, production (i.e., corporations), education, legislation and even governance. Nothing is immune from the next wave of Internet innovation that is bearing down — and right now, not tomorrow.

Because this is an insurance audience, allow me to mention that, the easiest (technically) and likely the first big innovation that will arise from the decentralization movement will be decentralization of insurance. With the advent of smart contract platforms such as Ethereum and Ripple Labs, people can form their own risk-sharing pools to cover a whole suite of perils now in the domain of insurance. (For the lawyers and politicians out there, it is also nearly trivial to set up voting, escrow, contract enforcement, etc., via the sort of block chain protocol that is the basis for Bitcoin.)

Last year, I published an article called “What if everyone was a BitCoin”? The core idea was that there are several problems with Bitcoin:

  • Concentration of wealth is worse than the dollar.
  • The proof of work that creates coin is trivial except for the fact that it is difficult.
  • The valuation was speculative.

Future Of Money – Not What You Think

Today, there are hundreds of companies forming, and being funded in the millions of dollars, that are investing in innovations that would create thousands, if not millions, of alt-coins with characteristics of Bitcoin, except iterated without the impracticalities of Bitcoin.

For example, MaidSafe was able to introduce a currency called Safecoin that provides a way to take unused computational capacity that members are willing to contribute and build a decentralized server network. This network encrypts data flowing through it, creating a secure and anonymous Internet. What happens to big data when people stop sharing the streams of information available on today’s Internet?

Further, innovations such as Curiosumé (by this author) could have wide-ranging implications on everything from education to corporate HR and factors of production – Curiosumé is an open-source development project designed to replace the resume as a means for describing one’s interests, skills and abilities; the tag line is, “Because the resume must die.” allows individuals to invest time and money in decentralized innovations without banks, insurance, corporations, etc. A new generation of venture capitalists such as DApps Fund is already funding new startups in crypto-currencies and demonstrating high convertibility and liquidity.

Every month, thousands of people are coming together at Meet-up  (itself an earlier social innovation) to learn, teach and collaborate on open-source platforms such as Ethereum, Bitcoin, Ripple and many others. Every day, with each article warning of the dangers of Bitcoin, there is another article of an ex-CEO banker coming out strongly in favor of the financial innovation in the crypto space. What is certain is that every impression placed on the public regarding these new technologies is bad for the status quo for banking and insurance.

Resistance predictably comes from the public voice of banks and governments, which have the most invested in the way things are. This is not to say that they are bad and wrong, just that they have the greatest infrastructure in place to support the existing system. Changing their minds is like pushing electric cars against the tide of Big Oil; lines have been drawn in concrete.

What we are seeing is not a “revolution” with a central army in a field of battle; there is simply a natural progression happening fueled by rational efficiency and nothing else. But change is inevitable.

As with previous financial innovations, my guess is that some trader may discover that the true risk associated with a particular crypto-asset is less than what the risk-adjusted market valuation indicates it is. Then, a financial instrument will be developed to exploit the risk-arbitrage. Some readers may recall the saga of Michael Milken, who correctly observed that companies with low credit scores were in some cases less likely to fail than their risk valuations indicated. This led to the creation of junk bonds and, ultimately, the idea that risk valuations can be skirted. To Milken’s credit, the assumption held until greed set in (which is not the fault of the asset).

I believe something similar may or must happen in finance to spawn internal innovation. For example: the insurance industry does not necessarily care about risk per se; the industry cares mostly that the risk is priced correctly. Soon, the insurance industry may realize that the risk of assets backed in crypto-currencies is lessened because of increased liquidity, fewer restrictions and regulations and rapid convertibility and because they are underwritten by better fundamental assets than the dollar. The industry will develop financial instruments that exploit this risk arbitrage and profit considerably.

But if the insurance company does not innovate in this future form of value, then people will build their own instruments. These new ideas and the technologies will enables millions of entrepreneurs and billions of engineers to print their own money one social agreement at a time. My advice to the insurance industry is to get in, help out and adapt before your customers leave you behind.

(Editors note: You are invited to join the author at The Future of Money and Technology Summit in San Francisco, Dec. 2, 2014, for his panel: Everything that Can Be Decentralized Will Be Decentralized.

The description is:

Much of our society today is based on centralized organizations that allocate our land, labor and money to create the things that we need. Today, we have an opportunity to specify and design any number of decentralized applications that also can produce all the things that society needs — except with stunning efficiency. This is a conversation about what is not only possible but is becoming increasingly probable. This group of speakers represent innovations that decentralize: data, venture capital, productivity, currency, contracts and knowledge — and that’s just the beginning.

The speakers are:

Paige Peterson – Maidsafe

Sam Onat Yilmaz – DApps Fund

Joel Dietz –

Christian Peel – Ethereum

Moderator: Dan Robles, The Ingenesist Project)

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