A network of markets

Markets have existed for as long as humans have engaged in trade and markets have emerged as a natural process of social coordination. The evolution of markets is constant, through a series of technological discoveries that help these markets to become more efficient.

Money has helped to facilitate trade and make markets much more efficient than bartering. In fact, it was around 5,000 BC that scripts first appeared and then around 2,500 BC when the first coinage appeared. With the onset of the agricultural revolution, and the rise of cities and kingdoms, an economy of favor and obligation didn't work. Therefore, money was invented as a much-needed solution.

Money allows participants within a community to compare quickly and easily the value of different commodities, and to easily exchange one thing for another. Cowry shells were a very popular representation of money used for thousands of years in Africa, South Asia, East Asia, and Oceania (Sapiens: A Brief History of Humankind, Yuval Noah Harari). Fast-forward a few thousand years and computers have made updating stock prices much more efficient than using chalk and blackboards, but how have networks and markets developed?

Naval Ravikant, the CEO and founder of AngelList, a website for startups, angel investors, and job-seekers, wrote a very insightful 36-tweet tweetstorm in June 2017 about a network of markets. Here is a summary of Naval's key points:

Blockchains will replace networks with markets. Humans are the networked species. The first to network across genetic boundaries and thus seize the world. Networks allow humans to co-operate and to allocate the fruits of our co-operation. It is this overlapping network that helps to create and organize society. Physical, digital, and mental roads connected us all together. Money is a network, religion is a network, a corporation is a network, roads are networks, electricity is a network, and all these networks must be organized according to rules. They require rulers to enforce these rules against cheaters. (https://twitter.com/naval/status/877467629308395521).

Ravikant further explained the different types of networks, such as social networks, the search network, the telecommunications network, and networks run by the elite, such as the university network, the medical network, and the banking network. The most exciting network mentioned was the blockchain network:

"Blockchains are a new invention that allows meritorious participants in an open network to govern without a ruler and without money. They are a merit-based, tamper-proof, open voting system where the meritorious are those who work to advance the network. As society gives you money for giving society what it wants, blockchains give you coins for giving the network what it wants".

The tweetstorm contained some very deep concepts (you may want to refer back to this when you reach the end of this book) that can be encapsulated by the very first tweet:

Blockchains will replace networks with markets.

Without having to understand what a blockchain is, but accepting that it is some technology that can enable the transfer of value without involving an intermediary, this statement conveys the idea that there is a technology that has come along and, for the very first time, allowed the creation of a network of markets, which is profoundly more powerful than the network of information.

These networks are essentially Open, Random, and Supportive (ORS)®, which is a concept expanded on in Chapter 9, Social Media and Influencers. Open and random mean permissionless because anyone can join the network at any time. Supportive means that these networks are neutral, censorship-resistant, and democratized.

This network of networks will also have to be interconnected because, as we've seen time and time again, the world will never agree on a single ledger or a single platform, as long as each provider wants to own the network.

Consider this: the largest taxi company in the world (Uber) owns no cars, the largest media company (Facebook) creates no content, the largest accommodation provider (Airbnb) owns no hotels, the largest e-commerce companies (such as Alibaba) own no inventory, and a $130 billion USD currency (bitcoin) has no CEO, no bank branches, and no customer support. What do they all have in common? They all have a network, be it of cars, rooms, suppliers, or trust (https://techcrunch.com/2015/03/03/in-theage-of-disintermediation-the-battle-is-all-for-thecustomer-interface/).

The Internet of information

The internet has allowed access to vast amounts of information and the ability to communicate with anyone in the world from a device in the palm of our hands. It has been a mammoth effort from contributors around the world putting all this information online. Need to know how to cook your better half's favorite dish? The chances are that the recipe will be online and there will probably be a video showing you step-by-step the process of cooking it too. In fact, it was reported that "how to" video searches have surged 70%, with over 100 million hours watched in 2015. (https://searchengineland.com/youtube-how-to-searches-up-70-yoy-with-over-100m-hours-of-how-to-videos-watched-in-2015-220773).

Near instant access to any kind of information was a scene from science fiction movies only several decades ago, but this has now become a reality. The ability to access this information and knowledge, and to communicate, has transformed multiple industries, such as media, telecommunications, and health, and the list goes on. What this information didn't change, though, was how value was transferred because intermediaries were still required.

Take the action of purchasing a pair of shoes online. The payment from the consumer to the producer was not a straight line between two parties but often a zigzag, with multiple intermediaries involved. This was necessary because there was no other way.

Another example is the political system, where when we vote for a representative, we are transferring the rights of our political value to the representative, so that he or she can represent our views for a certain period of time. We have always used intermediation as a tool to scale our society and this was required because there was no better technology to do anything differently.

We have since discovered, or perhaps, more appropriately, we knew all along, that this intermediation is not perfect. Look at financial institutions as an example: it could be argued that banks are the reason that more than half of the world's population has been excluded from basic financial services.

Then comes the predicament where these intermediaries or representatives, once they get big enough and the value they accumulate is large enough, have more incentives to service their own interest than those that they represent.

This leads us to the question: why is the internet that we know and love, that has changed so many aspects of human society, not managed to enable us to transfer value? The reason is relatively simple: information can be almost infinitely replicated without cost. The same music file can be downloaded millions of times, or a digital image can be replicated, shared, and used many times over, all for almost zero cost. This problem didn't have an answer in the decentralized world, until the invention of bitcoin.

Bitcoin, a digital asset, was really a blockchain technology that presented itself as bitcoin. Many people then incorrectly thought that bitcoin was the first application of the blockchain technology. More on this in Chapter 2, A Bit of Coin Theory. This is analogous to the development of other technologies, where there was some product that embodied the technology, but as the technology matured, there were different designs aimed at different use cases.

Take, for example, automobile technology, where the goal was to get from point A to point B quicker than on foot or horseback. This technology then developed to getting from point A to point B with a heavy load (a truck), or with a group of people (bus), or even with renewable energy (electric cars). This design-driven approach is focused on one specific use case, rather than a generic design that fits every use case.

Blockchain is similar because there are thousands of token projects searching to find the right use case to focus on and be successful at. The challenge, though, is to look beyond bitcoin because the modus operandi is that we only see what we already know. Many thought PCs were just powerful typewriters and the internet just a place where computer nerds hung out. In fact, Keynesian economist Paul Krugman, who was awarded the Nobel Prize in Economic Sciences in 2008, wrote an article in 1998 on the topic:

"The growth of the internet will slow drastically, as the flaw in 'Metcalfe's law'—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the internet's impact on the economy has been no greater than the fax machine's. (http://web.archive.org/web/19980610100009/www.redherring.com/mag/issue55/economics.html)."

We all know now that the internet's impact on the economy is much greater than the fax machine, but it was Krugman's most recent article, in July 2018 in The New York Times, that had many critics up in arms:

"In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years. Why would you want to do that? What problem does it solve? I have yet to see a clear answer to that question" (https://www.nytimes.com/2018/07/31/opinion/transaction-costs-and-tethers-why-im-a-crypto-skeptic.html).

It is almost impossible to see the full potential of any technology from the beginning. Bitcoin may be that powerful typewriter but we must wait for its true potential to reveal itself in the next decade or so. This is because bitcoin is the first network of networks for the transfer of value without requiring an intermediary.

The Internet of value

The Internet of value allows important things in an economy or market to be transferred, instead of just information. The difference between information and value is the scarcity: if you give information to someone you still own it, but if you transfer value to someone, you do not own it anymore. Examples include stocks, intellectual property, art, music, votes, identity, and, of course, money. The Internet of value provides the ability to move value as easily as we move information.

Being able to send the same $1,000 to more than one recipient is not a good idea and this is known as the "double spend problem," which is explained in Chapter 2, A Bit of Coin Theory. The problem has previously been managed through intermediaries, such as banks, governments, and numerous other third parties, to establish trust in our economy. They provide the service of identifying people, verifying, clearing, and settling the transaction, and keeping records, so that you cannot spend the same $1,000 twice.

The result, over time, is an increase in cost, a reduction in value, and the exclusion of a large number of people from the global economy. These intermediaries also capture our all-important data. With this new technology called "blockchains", or more accurately "distributed ledger technology", there is a decentralized network where trust is native to the medium. Value can be created, transferred, or exchanged and participants trust the network and the mathematics (believe it or not, the world we live in is governed by the laws of mathematics).

In this Internet of value world, value is represented by none other than a token and the value it represents is governed by the various laws of economics, where the simplest is supply and demand. This has given rise to the concept of tokenomics.