Bitcoin: Innovation Hiding in Plain Sight

European Straits #53

Nicolas Colin

Dear all,

Bruno Le Maire, the French Minister of the Economy, just announced a fund of 10 billion euros intended to finance “disruptive innovations”—a promise made last year by Emmanuel Macron.

For those observing from afar, it would seem that France is ready to get things turned around. But really, the signal that Le Maire is sending isn’t so clear. In a remark on cryptocurrencies, in particular, he effectively denounced the speculation surrounding Bitcoin, noting his preference for “stability”. How, exactly, does one promote stability at a press conference dedicated to disruptive innovations?

To understand cryptocurrencies, we must look back to the origins of the Internet. A key component in its infrastructure are the network protocols, which are to the Internet what the highway code is to driving. HTTP (access to information), TCP/IP (routing of information), and SSL (encryption) bring together the rules that allow us to connect networks at a global scale.

All of these protocols are now old, and the Internet’s architecture still includes some glaring holes—almost as if we didn’t yet have a rule requiring cars to stop at red lights. Indeed there are some needs that open and shared protocols could address: preventing identity theft; solving the many problems with emails; securely and freely transferring money (as is permitted by the protocol underlying Bitcoin); giving users more visibility and control over the collection and use of their personal data.

If we don’t currently see much innovation in terms of protocols, it’s because there’s not a whole lot of people available to do it. The best developers work where the money is: in large tech companies working on proprietary platforms or applications. And these companies ignore protocols. Writing and promoting new rules for the Internet doesn’t really do anything for them. They prefer to work on their own private version of the rules of the road, which are enforced only within their proprietary ecosystem.

This is how we need to be looking at cryptocurrencies: an attempt to renew innovation in the realm of network protocols that are neglected by today’s Internet giants. The key function of a cryptocurrency is to get the early users of a new protocol interested in its large-scale deployment. The more individuals who own cryptocurrencies (like Bitcoin) linked to a certain protocol, the more they contribute to increasing its operating scale; in turn, the more a protocol is used, the higher the value of the cryptocurrency, which rewards the early users for the critical role they played during the launch phase.

It’s like giving out a coupon to someone who stands next to one particular red light and waves at drivers to make sure they stop. But it's not an ordinary coupon: the more drivers stop at red lights in general, the higher the value of the coupon. And so that person not only has an incentive to do their job, they also have an incentive in drivers getting accustomed to always stopping at red lights—thus they’ll try to enroll other people to stand and wave at other red lights. Hence begins the "Red Light Bubble".

When successful, the hype obviously pulls in speculators, who opportunistically follow the crowd without showing any interest in the protocol itself. But their arrival is not completely useless, as they contribute to grabbing the attention of new generations of users. As Carlota Perez has shown, such speculative bubbles are a determining factor in the emergence of disruptive innovations. Investors must temporarily abandon their rational decision-making in order for an innovation to cross the threshold to widespread adoption. In other words, speculators are the useful idiots of disruptive innovation—and bubbles are toxic only when they infect the banking system, which is not the case with cryptocurrencies.

The protocol creators understand this dynamic of innovation being fueled by bubbles. At the dawn of the Internet era, such growth hacking and consensus mechanisms were not needed: it was enough that the US government and international governing bodies decided that particular protocols would be used to satisfy the rather small Internet of the day. But now it’s become near impossible to impose a new protocol at the scale of the entire Internet.

Hence cryptocurrencies (or “crypto tokens” or “crypto assets”, as we should call them so as not to entertain the confusion with actual currencies). Those were not designed for speculation, but to orchestrate the emergence and deployment of a new generation of network protocols that bypass large tech companies and repair the existing holes in the Internet’s rules of the road. The goal is political: to once again shift the Internet’s infrastructure toward open protocols, if possible through decentralized architectures. Once put under the thumb of tech giants, who have long exerted a power of life or death over the application layer of the Internet, developers have finally gone on the counterattack.

Now the French government has given Jean-Pierre Landau, a former central banker, the mission of formulating a report on cryptocurrencies. The obvious issue is that, like Bruno Le Maire, he tends toward “stability”. And the risk is that France, rather than crafting its regulations at the proper level (that of applications, not protocols and the related token systems), will completely miss the disruptive innovations taking place in protocols. The country would thus also, quite paradoxically, be supporting the position of US tech giants currently faced with the disruption of new network protocols.

But another approach is possible: educate the public at large; ensure that crypto-bubbles remain at the margins of the banking system; and above all, mobilize the state so that during the speculation phase it facilitates the emergence of the most promising protocols. By endorsing certain protocols and even using them themselves to provide better public services, national governments can strategically guide improvements in the Internet’s highway code.

Indeed we don’t need “disruptive stability”; what we need is an industrial policy that is properly adapted to the age of ubiquitous computing and networks. It’s all the more needed because the crypto economy is an opportunity for Europe to better position itself in the global digital economy. We at The Family are starting to see exactly that happening in Berlin, Germany, where an impressive, fast-growing ecosystem of world-class developers is riding the new wave of disruptive innovations in crypto protocols.

Here are a few interesting takes regarding cryptoeconomics:

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Warm regards (from London, UK),

Nicolas