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Will blockchain replace the web? (Includes first-hand account)

Albert Wenger has a vested interest in the success of blockchain technology. He’s managing partner at the New York-based Union Square Ventures , which is investing in companies that rely on blockchain. He believes that cryptocurrencies like Bitcoin and Ethereum (there are now hundreds) hold great promise. He bases his conviction on the underlying technology – blockchain – a buzz word these days even if most people don’t have the slightest idea what it is.
Addressing an audience at the Northside Festival, an annual technology and music gathering in Brooklyn, Wenger discussed the changing nature of the technology, and all the different directions blockchain might take in the future.

Wenger began with a brief history lesson. Several startups Union Square has invested in — Tumbler, Twitter and Etsy — grew into large and powerful companies. Certainly, Amazon, Facebook and Google have become so dominant that regulators – in the U.S. and Europe – are beginning to consider ways of curbing their influence. (Only in China do you find digital companies of similar scale.)

“Twenty years ago, you’d have these companies competing for the same market.” Not anymore. Now they largely control their markets.

Testifying before Congress in April, for instance, Facebook’s founder and CEO Mark Zuckerberg was asked whether his company had any competitors.

“If I buy a Ford, it doesn’t work well, I don’t like it; I buy a Chevy,” Sen. Lindsay Graham observed, “If I’m upset with Facebook, what’s the equivalent product I can go sign up for?” Zuckerberg hemmed and hawed, asserting that several other companies offered similar services to Facebook. “You don’t think you have a monopoly?” Graham pressed him. “Doesn’t feel like that to me.” It was the best that Zuckerberg could do.

“Our value system today is informed by industrial society,” Wenger said, “but we’re past that. Until we have more of a discussion about values in a postindustrial society we won’t get the best out of our systems.”

Wenger believes that blockchain may allow us to do just that even though it may mean a total transformation of those systems. Eons ago – well, make that twenty years or so – “a lot of us deeply believed that the web would result in an incredibly decentralized world.” It was a world where writers could publish their own work and artists could put out their own art without the mediation of agents, gallerists or publishers. Entrepreneurs could find their customers without the need of factories or warehouses. “Of course, that’s not the world we’ve grown up in.”

Why this utopian vision failed to materialize is due to the inherent clumsiness of the web protocol that governed the user experience. If you made a request to the web server (find me the cheapest airline flights to Kansas City) at ten o’clock in the morning and then made the same request again an hour later, you had to start from scratch. There was no memory of your original request in the server. That made some tasks very hard which we now take for granted like the shopping cart that sites like Amazon use to digitally track items you’d like to purchase until you check out. That innovation is due to cookies which for better or worse track our searches across the web. The information is kept stored in vast databanks – otherwise known as clouds — which are mainly controlled by tech giants.

Amazon’s data cloud holds the shopping records of millions of its users. Facebook’s cloud contains a trove of billions of users’ personal information. Startling revelations about data breaches and the cavalier way in which companies share confidential data as Facebook has done have spurred some tech savvy individuals (almost all of them male) to explore an alternative to this monopolistic system so that Mark Zuckerberg doesn’t end up as “president of the world’s data.” That alternative is blockchain. “Blockchain allows us to create databases not owned and operated by big companies.”

Blockchain is no panacea, at least not yet, Wenger cautioned. It’s still in its infancy and hard to use. “It has a sucky database right now, it’s slow, and there’s no one to call if something goes wrong.” Say your Bitcoin or token (which could be worth thousands of dollars) goes to the wrong place, there’s no bank to call to trace its whereabouts, much less get it back. For the time being, blockchain won’t replace Facebook or Amazon.

Nor is this technology particularly useful when it comes to overhauling our rickety healthcare and education systems, neither of which has changed much since the days before the Internet. “There many things we can do with existing Internet technology to improve them,” said Wenger. You don’t need blockchain to save patients the necessity of filling out four or five forms with the same information each time they see a different doctor, for instance. The situation is analogous to the early days of PCs. PC’s didn’t replace mainframes, but rather provided desktop computers to people who didn’t have a computer at all.

Where blockchain has proven successful, though, is in countries like China which has imposed capital controls, limiting the amount of money its citizens can transfer abroad. Blockchain, because it’s decentralized, allows for the movement of funds without government knowledge or intervention. Decentralized currency, Wenger said, may also make a lot of sense in countries where the government manipulates currency and hyperinflation is rampant.

Ironically, the authoritarian regime in Venezuela, a country which meets both those criteria, has tried to exploit blockchain by creating its own cryptocurrency as an alternative to its own currency – the bolivar – which is practically worthless. “There are many other exciting applications, but you’ll first see them in areas where they have immediate application.”

As an example of how blockchain is disrupting the traditional model, Wenger pointed to CryptoKitties (technically, it’s not a cryptocurrency, but rather a blockchain virtual game in which players collect and trade various breeds of virtual cats). Aside from being cute, these ‘kitties’ are unique; that is, there are only so many produced (in the form of a token), for a total of four billion. Wenger has reason to promote CryptoKitties. Union Square Ventures helped raise the initial capital to finance the game.

This model could have more practical applications. Now anyone with a computer can download an image of an artwork, but that isn’t the same as owning the artwork. But with blockchain, an artist could limit the number of images he or she distributes, assigning each a unique number or ID, which could then be collected and traded.

Using this model, an artist would have a stake in the resale of the work (currently, the artist doesn’t profit when a collector or an auction house sells the work). More recently, editors and reporters defecting from the Denver Post in protest against the policies of its owner, have teamed up with a start-up that will use blockchain technology to launch a rival news outlet, The Colorado Sun. (Ultimately, the startup, Civil Media Company, hopes to put out a thousand publications in the U.S. using blockchain.) The idea is to take power away from a single owner who might be more interested in profits than in publishing news, and give it to anyone who buys a Civil Media token, a form of cryptocurrency.

Innovative funding mechanisms aren’t new – think Kickstarter or Go Fund Me – but blockchain may offer even more advantages, Wenger says, shifting the balance of power from investors towards entrepreneurs and users. “You can issue a token and people anywhere in the world can honor it.” These tokens “represent a piece of ownership in a network.”

The network is made up of many computers called nodes. In fact, the purchase of these tokens helps to subsidize the construction of the network. In that sense, they are the equivalent of shares in a publicly traded corporation. “Coins provide the capacity to secure the network and give it its storage capacity.” Participants in the blockchain can opt to use some of their computers’ spare memory to monitor and record transactions. “Coins allow people who have storage to relate to people who need it.”

Although he thinks that blockchain “is a good thing overall,” Wenger acknowledged that it also attracts a lot of people who want to get rich quickly. That urge to cash in inevitably leads to scams with some investors rewarding themselves at the expense of others and tokens simply vanishing into the ether. There are also concerns about exchanges that trade in these coins.

A finance professor at the University of Texas has just published findings in which he asserted that Bitcoin’s value, which at one point had reached almost $20,000 per coin, was artificially manipulated by Bitfinex, described as “one of the largest and least regulated exchanges in the industry.”

By mid-June, its price had sunk to below $6,000. In 2014, the largest cryptocurrency exchange at the time – Mt Gox – went belly-up. More recently, in April, an exchange in South Korea went bankrupt after a hack resulted in significant losses of the tokens it was holding. Investors had no way of getting their money back.

Because they’re anonymous, untraceable and barely regulated, cryptocurrencies also appeal to criminals who use them to buy and sell illicit drugs, weapons and contraband on the dark web. Untraceable digital money also makes it easier to bribe politicians.

But investors who cherish the wild west atmosphere of the cryptocurrency world may be in for a rude awakening. Regulators like the Federal Communications Commission and the Securities and Exchange Commission are looking for their pound of flesh. That attitude stands in marked contrast to the early days of the web when regulators basically took a hands-off approach, waiving sales taxes on online purchases, for instance, or exempting platforms like Facebook from liability for threats or defamatory remarks their users might post.

Regulators are particularly wary of blockchain technology, though, because up until now, the government has reserved for itself the ability to create money, control its supply and collect taxes. But there’s only so much that any single government can do. “This is a global phenomenon.” If you don’t like the regulations in one country, you can set up shop in another. Singapore offers a far more favorable climate for cryptocurrency traders, for example, and one of the most widely traded cryptocurrencies – Ethereum – is based in Berlin.

Wenger is skeptical that we need more regulations anyway. For one thing, the regulatory regime governing markets and financial activity, he says, originated in the 1930s, in a pre-Internet age when information was very expensive. For another, he points out, “we already have regulations to prevent fraud.”

Wenger is undeterred by the volatility of these currencies, the unreliability of the exchanges where they’re traded, or the uncertainty posed by regulators. “We have to realize that mistakes will be made along the way.”

On the other hand, as he points out, no technology is either all good or all bad. “I don’t think we can plan it (blockchain) out ahead of time – here’s a perfect society and values, let’s build the technology that supports that. Did we think that Twitter was going to be used by the President to intimidate journalists? Does that mean I think we shouldn’t have invested in Twitter at all? It’s all about political engagement and process. One of the biggest threats we face is that we have a barely functioning democracy in the U.S. If we don’t fix that nothing else will work.”

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